Wesfarmers (WES)

Perth, Australia

KEY TAKEAWAY: Wesfarmers of Perth has built a $50 billion market cap company making it easy for do-it-yourself home improvement enthusiasts and professional contractors to buy supplies quickly, cheaply, and close to customer homes.

By building its Bunnings store brand in the DIY space, Wesfarmers has made Bunnings the preferred option for professionals, much like Home Depot in the USA. This combination is its competitive moat.

Wesfarmers has a far stronger balance sheet, with a debt to equity ratio of 1.0-1.5 vs 11-50 for Home Depot over the past year.
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Bunnings's customer base has shifted from almost all DIY homeowners to a mostly equal balance of homeowners and professional contractors over the past ten years. This enables it to serve homeowners who do not want to do their own improvements.

Wesfarmers has dramatically improved its operating efficiency over the past decade which has enabled it to maintain 6% growth in revenues and net income despite two strong headwinds.

Housing starts in Australia were falling 1%-2% annually over the past decade, which dampens demand for home construction materials. This is the result of zoning restrictions, inadequate infrastructure in areas where job growth is strongest, i.e. Sydney, Melbourne and Perth, and skyrocketing home prices in those areas.

The Australian Dollar ("AUD") has depreciated 3%-4% annually against the US Dollar over the past ten years, and cost of materials rose 8% per year in AUD terms, squeezing Wesfarmers's gross margin.

Currency hedging markets are liquid and reasonably priced for durations up to two years, but far less so beyond that. As a result, Wesfarmers's policy of hedging 70%-100% of import costs on a rolling 12-24 month basis turned out to be inadequate in the face of the long term AUD decline.

Wesfarmers successfully battled these adverse conditions by dramatically increasing operational efficiency. It converted a large portion of its energy consumption to solar, thereby sidestepping rapidly rising fossil fuel prices.

It mitigated labor shortages by automating a number of functions using AI driven tools. These included accounting, human resources, new product testing, etc. As a result operating expenses declined from 35% of revenues in 2014 to 25% in 2024.

Wesfarmers earnings grew 7%-9% annually in adverse conditions beyond its practical control, that affected both demand and costs.

Bunnings leveraged its improved operating efficiency to grow during the lean times, adding over 100 new stores over the past five years, for a total over 500. Its market share is now comparable to its two nearest competitors combined - i.e. Mitre 10 and Home Timber & Hardware.