Is Travis Perkins running out of patience with Wickes?

On Tuesday, Travis Perkins provided investors with their usual Interim Results update for the six-month period ending 30th June 2018. Investors and the City were expecting more of the same, a solid set of results from a well-managed company that has done little to disappoint shareholders in recent memory.

What they actually reported, came as something of an uncomfortable surprise to many. The overall Group performance was good, with solid revenue growth of 4.4% and like-for-likes, a pleasing 4.2%. This had been generated through a good trading performance in the trade focused parts of their business including General Merchanting, an improving Plumbing & Heating Division, Contracts and fast growing Toolstation. So, with such a strong performance in what we all keep convincing ourselves is a challenging market, why did the TP share price close at ￡1102 on Friday, almost 18% below it’s Monday closing price of ￡1340.50? The answer is Wickes, who in less than 18 months has moved from blue-eyed boy to the problem child of the group.

In the six-month period to 30th June 2018, Wickes sales declined 5.8% (7.7% LFL). Surely there’s nothing out of the ordinary here, after all it was only in May that Kingfisher announced B&Q had suffered an 8.8% decline (9.0% LFL) in sales during Q1 (Feb-Apr 2018). The only other remaining Big-Box DIY retailer Homebase, has had its own, well documented troubles and the last update from Wesfarmers, prior to giving the business away to Hilco, stated Homebase performance at -14.7% (LFL -13.9%) for the nine months to the end of March 2018. So what’s the problem? If Wickes are outperforming their peers and looking to reduce costs, including laying off almost a third of their Head Office staff, then we should all be relatively pleased with their performance?

Read – One third of Wickes Head Office staff to be made redundant

The truth is, Wickes performance during the six month period to 30th June is staggeringly poor. So poor in fact, I believe John Carter and the senior TPG team, still haven’t got to the bottom of what actually went wrong and even more concerning, what to actually do about it.

We all know how the weather impacted the market during the first three months of 2018, but since then, there has been a dramatic improvement. In the UK, when we experience a period of good weather, it always benefits the Home Improvement and Garden market, we’re a seasonal business and as retailers and suppliers, we live with the peaks and troughs. But there’s an interesting element to this. In the UK, when we first experience a period of good weather (let’s be honest, this usually lasts no longer than one or two weeks), we flock to DIY Sheds and garden centres to buy plants, BBQ’s, lawn-mowers, garden furniture and everything else garden related. 

But when the period of good weather continues and looks settled for some time ahead, we can no longer put off those larger home improvement projects and tasks that we’ve been waiting to do for some time – painting the inside or exterior of the house, tiling the bathroom, laying that deck, building that shed etc.. I’m sure we’ve all also experienced the ‘feel-good’ factor that comes hand in hand with the good weather, triggering our desire to improve our homes and living spaces and this is exactly what has happened since the second half of April 2018.

This has had a very positive and sustained impact on our market, lasting some 14 weeks and by the look of it, may continue for one or two weeks more. So, with the weather having such a positive impact on the market for the last four months and with at least ten good weeks contained in the Wickes figures to 30th June, why has that business suffered?

The reality is that with much smaller seasonal ranges and an almost non-existent garden offer, Wickes have not been in the game. With the majority of customers shopping baskets containing some garden or seasonal related products, when it came down to the choice of store for consumers, Wickes was ignored in favour of B&Q, Homebase, The Range and B&M Bargains. During the investor call Carter admitted ‘And so the weather opened up in May and June, it clearly would have been a benefit to us, but it actually benefits the outdoor categories, which is one of our weaker categories. So, although we benefited from the better weather, we weren't actually in the sweet spot of garden products and outside furniture’.

Consumers had chosen to flock to the retailers who offer large and credible garden and seasonal ranges and whilst there, they’ve purchased a broader range of home improvement products and everything they need for their larger projects. This has led, to what we understand have been a number of record sales weeks across B&Q, Homebase and Wyevale since the beginning of May.

Queues at a B&Q Warehouse in May.

The decision for Carter to blame ‘weaker consumer spending and challenging market conditions’, is likely to come back and bite him, when Kingfisher reveal their Q2 performance on 16th August. Kingfisher’s Q2 period runs from 1st May to 31st July and if there was ever a sweet-spot, then this is it, three months of fantastic weather, driving increased footfall into B&Q stores and with growth virtually guaranteed at Screwfix, the position for Kingfisher UK & Ireland, looks certain to be in high single if not double-digit like for like growth for Q2. This comes at a perfect time for Veronique and the One Kingfisher Plan and is likely to give the senior team some breathing space for the remainder of the year. The lack of understanding of this position and general pessimism following the Travis Perkins update also impacted Kingfisher's share price on Tuesday, pushing it down 2.8%, although it has since recovered a little.

Back to Wickes and the poor performance has triggered Carter to announce “a comprehensive review of its business, with a view to driving stronger performance and enhanced value for shareholders in the medium term.” In the investor call, he elaborated further "we are looking and have been thinking very much about how appropriate our business should be going forward. We expect these market conditions to continue for the foreseeable future. So we think it's appropriate time to step back and take a comprehensive review of our business. As always, we're going to be focusing on improved performance and enhancing shareholder value, and we aim to bring you the conclusions of that review at our Capital Markets Day in early December".

In our view, with a solid, growing and more predictable trade business, the strategic review of the TP business can only lead to one conclusion and that is the disposal of the Wickes business, which we believe will be announced in December. It’s delivered good sales growth in recent years, but it’s barely profitable (we estimate an EBITDA of around ￡51m for the 12 months ending 31st December 2017 on a turnover of ￡1.213bn), before their position worsened in 2018. It’s current market position has been painfully exposed in these latest results and we believe TP shareholder value can only be enhanced without Wickes in the Group.

Source: Steve Collinge - Managing Director Insight Retail Group Ltd.

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