MMI think its a dangerous short, the market has momentum WES...

MM

I think its a dangerous short, the market has momentum WES stock price has momentum but most importantly WES has strong momentum in the areas that are providing the bulk of its EBIT namely Coles and Bunnings ( which collectively contributed 62% of fy12 EBIT)

Without getting long winded the principle reason i feel its a dangerous short is the existing gap between Coles EBIT margin which in fy12 was 4.6%, and that of their largest competitor Woolies Food and
Liquor which had a fy12 EBIT margin of 7.5%. Put simply i think McLeod still has some low hanging fruit to pluck.

McLeod has a successful business model to copy. Coles may be leading the way in grabing consumer attention, but behind the scenes the reinvigoration of Coles business is purely about duplication of WOWs model in terms of consolidating and driving efficency across the logistics of the business. For example less and larger more automated DCs, eliminate DSD delivery, reduce waste and inventory through Autostocker etc

The last four years Coles EBIT margin has expanded by 120 basis points, i believe this margin expansion will continue.

You need to be careful in listening to the financial media running stories about the fierce retail fight between these two competitors. Both have expanded margins in the last two years. They are adept as running low margin leaders and growing margins in other areas of the business. Its also necessary to be aware that even if GP margins fall they can still drive up margins lower down the P&L, through productivity gains and increased unit volume.

Reading headlines gives the impression that their profitability and growth is mutually exclusive but this is far from true imo. Collectively they are drawing a larger % of consumer spending year after year - and the Australian consumer thinks they are benefitting from a price war.

Masters is no threat to Bunnings, collectively they are a threat to independent Hardware retailers who will be squashed between them. Bunnings has enjoyed store number growth, comp store growth and margin expansion for the last 8 years. Last year they had an EBIT margin of 11.6% - unpresendented for a large box retailer. There is plenty of space in Home improvement for both to co exist.

Disc. Own WOW