Reece Battling Tariffs, Competition & Cost Crises

Australia | Jul 01 2025

It is not just Australia suffering a housing affordability crisis. The US is also suffering, particularly in the south, impacting Reece's revenues and margins.

-Reece downgrades FY25 earnings guidance
-Rate cuts not yet boosting A&NZ housing construction
-Weak conditions and competition persist in the US
-Most analysts prefer caution for the near term

By Greg Peel

Plumbing, building and hardware supplies company Reece's ((REH)) latest trading update saw management downgrading FY25 earnings guidance to $548-558m some -6% below consensus. Housing affordability and lack of construction across both A&NZ and the US have impacted on the company's revenues and margins, and increased competition in the US is not helping.

Management noted the trading environment, which was weak through the first half, has remained challenging, with no material improvement seen in the second half. Reece's share price has fallen -50% since its last peak in October last year.

In Australia, where governments both state and federal are struggling to increase housing supply, recent RBA rate cuts are yet to translate into any improvement in housing activity, management noted. Indeed, the cuts to date, and the expectation of more to come, have only sent house prices back on the rise, weighing further on affordability.

It is in the US, nevertheless, where Reece is facing the greatest challenges.

Dixie Drag

Reece's US store footprint is heavily concentrated in the southern "sunbelt" states, a region, Citi notes, that has historically produced the majority of America's new home construction and acted as a structural tailwind in recent years. However, this geographic skew is now becoming a relative headwind, with southern housing markets underperforming the rest of the country.

Housing prices across the region have declined as inventory levels rise toward GFC-era. This suggests ongoing pressure in Reece's core markets, and potentially increased competition as the pool shrinks.

On the subject of competition, UBS notes Reece derives some 40% of its US earnings from its Waterworks business. STAline has emerged as a direct competitor to Reece, and is currently ramping up its store rollout, which could be a three-year process. Market share losses for Reece could be reasonably material, UBS warns, given a direct overlap in target markets.

Reece's high exposure to the US residential new construction sector continues to impact its performance. Morgans notes housing units under construction remain down year on year, particularly in the region it operates. Mortgage rates remain high and housing affordability continues to weigh on the US residential market.

Although hinting at a possible rate cut this month, the Fed remains cautious of the potential impacts of Trump's tariffs, which at this stage have no clarity, and hence may yet choose to stay on hold.

Reece has also seen increased competition across all segments of its US business from new market entrants, not just for Waterworks, and the slowdown in residential new construction, which has impacted profitability for the year. Morgans sees increased competition as a key risk to margins going forward.

While competitive intensity could weigh on gross profit margin outcomes, the group is clearly prioritising longer-term competitive capability, Macquarie notes, by investing in SG&A (selling, general & administrative expenses) and organisational capacity. Macquarie thinks this is a sensible approach.

The US tariff context remains uncertain. Macquarie has lowered its price adjustment in FY26 to current China tariff levels of around 34% from around 145% prior. Macquarie continues to assume an almost complete price-based cost recovery and no margin percentage recovery.

We note Trump's cut in China tariffs reflects another 90-day "pause", as was the case with Liberation Day tariffs. The latter expire next week, while the China pause expires in August. We might also note it's not just about China, with regard housing construction. The US imports significant levels of lumber from Canada, for example.