Wickes builds market share as uncertainties mount

The overriding consideration for investors in Wickes (WIX) is the extent to which runaway inflation will impact demand for its home maintenance, repair, and improvement products. Some of this will boil down to necessity. The need to fix a leaking downpipe is not the same as a desire to repaint an architrave; only the latter falls under the general heading of “discretionary spending”. But with inflation at elevated levels, will the likes of Wickes witness a marked fall-away in demand from homeowners, thereby erasing some of the unexpected benefits that accrued from the lockdown periods?

The group’s latest half-year figures suggest that sales may be holding up better than expected, although its business trends are certainly open to interpretation. Wickes floats the possibility that the shift towards hybrid working patterns is “increasing the dwell time at home, fuelling further desire for homeowners and tenants to invest in their properties”.

It’s a nice theory, though difficult to support from an empirical angle. Indeed, the group’s latest Mood of the Nation survey points to a “moderate slowing of demand for home improvement from its post-Covid levels”, even though trade demand remains robust. We’re not sure if the term “moderate” is particularly apt.

Like-for-like (LfL) sales - those from established outlets – increased by 0.8 per cent through the period; a pleasing enough result given tough comparators. But it’s worth remembering that LfL sales for the year ending 1 January 2022 were up by 13.0 per cent on 2020 and 18.6 per cent on 2019. Realistically, shareholders should take heart even if Wickes holds on to a relatively modest slice of its sales boost it received during lockdowns, extraordinary circumstances by any measure.

Management admits that overall market volumes have declined due to macroeconomic issues, but it also maintains that the group’s core market share has risen. Rising inflation contributed to a 70-basis point reduction in the gross margin, along with a higher proportion of lower-margin TradePro sales. One assumes that the steady growth of digitally enabled sales could help to support margins over the long run.

The fact that its “customers are becoming more discerning on price and are shopping around more” is hardly surprising, but the real test will come once the northern winter descends, placing even greater strain on household budgets. A lowly forward rating of 5 times adjusted consensus earnings and a double-digit forward dividend yield suggests that the market does not share management’s faith in Wickes’ end markets, but the sell-off since the start of the year appears extreme given that Wickes continues to build market share, even if that amounts to a bigger slice of a shrinking pie. Buy.  

Last IC view: Buy, 200p, 09 Jun 2022