The Masters Of Hardware Hell

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

– Woolworths hosts analysts tour of Masters store
– Initial reactions mixed
– Citi suggests currency guidance for Masters is conservative
– Brokers ratings for Woolworths unchanged

By Chris Shaw

Woolworths ((WOW)) has opened its first Masters home improvement store in Braybrook, Victoria, and the company has hosted an analysts tour that has provided some first impressions of the new competitor to sector heavyweight Bunnings ((WES)).

Citi's first impressions of the store were positive, particularly with respect to the product range and store format. One concern was the trade area, something Citi sees as important given trade represents about 50% of sales in the industry. 

In Citi's view Masters will need to stock a deeper range of products to fully satisfy the trade end of the market, but with improvements expected the broker sees scope for this offering to become more attractive.

For JP Morgan the tour highlighted a focus on all customer segments, as the product range at Masters extends beyond hardware and into the home improvement end of the market. The current focus is on customer experience rather than price, with JP Morgan seeing upside with respect to the value proposition once more stores are opened.

Macquarie came away less impressed however, seeing no clear sign of what the Masters brand stood for in the market. Like Citi, Macquarie expects improvement as operations are refined over time.

One issue for Macquarie is that Woolworths doesn't have a core competency in bulky goods, which suggests a higher level of risk in entering the home improvement and hardware market. But the fact Woolworths has a partnership with Lowe's and has acquired Danks to boost its wholesale capabilities reduces this risk in the broker's view.

As JP Morgan points out, early trading at Masters has exceeded expectations. A positive for JP Morgan is the use of a distribution centre model rather than a direct sourcing approach, as while initial fixed costs are higher, gross margins should also be higher. Citi expects long-run gross margins of 35-38% and an EBIT (earnings before interest and tax) margin of 8%.

Woolworths expects to break-even in the Masters chain in 3-4 years, assuming 15-20 new stores are opened annually. Citi takes the view the guidance from Woolworths for a $100 million loss from Masters in FY12 is conservative, as it assumes a slow ramp-up in stores. Early indications from the Braybrook store imply some upside risk.

Citi assumes Masters will eventually generate sales of $3,000 per square metre in its Masters stores, which implies $40 million per store at maturity. This compares to typical sales at a Bunnings store of around $4,000 per square metre.

Post the tour there are no changes in ratings for Woolworths, the FNArena database showing four Buy ratings, three Holds and one Sell recommendation. Price targets are also unchanged, the consensus target standing at $27.68. Targets range from $23.50 to $30.00.

Shares in Woolworths today are higher and as at 2.10pm the stock was up 31c at $24.57. This compares to a trading range over the past year of $23.70 to $30.18. The current share price implies upside of around 12% to the consensus price target in the FNArena database.

 

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