##{"id":58850,"date":"2011-09-16T10:17:02","date_gmt":"2011-09-16T00:17:02","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/09\/16\/the-masters-of-hardware-hell\/"},"modified":"2011-09-16T10:17:02","modified_gmt":"2011-09-16T00:17:02","slug":"the-masters-of-hardware-hell","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/09\/16\/the-masters-of-hardware-hell\/","title":{"rendered":"The Masters Of Hardware Hell"},"content":{"rendered":"

\n\t– Woolworths hosts analysts tour of Masters store
\n\t– Initial reactions mixed
\n\t– Citi<\/span> suggests currency guidance for Masters is conservative
\n\t– Brokers ratings for Woolworths unchanged<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tWoolworths ((WOW)) has opened its first Masters home improvement store in Braybrook<\/span>, Victoria, and the company has hosted an analysts tour that has provided some first impressions of the new competitor to sector heavyweight Bunnings<\/span> ((WES)).<\/p>\n

\n\tCiti's<\/span> first impressions of the store were positive, particularly with respect to the product range and store format. One concern was the trade area, something Citi<\/span> sees as important given trade represents about 50% of sales in the industry. <\/p>\n

\n\tIn Citi's<\/span> view Masters will need to stock a deeper range of products to fully satisfy the trade end of the market, but with improvements expected the broker sees scope for this offering to become more attractive.<\/p>\n

\n\tFor JP Morgan the tour highlighted a focus on all customer segments, as the product range at Masters extends beyond hardware and into the home improvement end of the market. The current focus is on customer experience rather than price, with JP Morgan seeing upside with respect to the value proposition once more stores are opened.<\/p>\n

\n\tMacquarie came away less impressed however, seeing no clear sign of what the Masters brand stood for in the market. Like Citi<\/span>, Macquarie expects improvement as operations are refined over time.<\/p>\n

\n\tOne issue for Macquarie is that Woolworths doesn't have a core competency in bulky goods, which suggests a higher level of risk in entering the home improvement and hardware market. But the fact Woolworths has a partnership with Lowe's and has acquired Danks<\/span> to boost its wholesale capabilities reduces this risk in the broker's view.<\/p>\n

\n\tAs JP Morgan points out, early trading at Masters has exceeded expectations. A positive for JP Morgan is the use of a distribution centre<\/span> model rather than a direct sourcing approach, as while initial fixed costs are higher, gross margins should also be higher. Citi<\/span> expects long-run gross margins of 35-38% and an EBIT (earnings before interest and tax) margin of 8%.<\/p>\n

\n\tWoolworths expects to break-even in the Masters chain in 3-4 years, assuming 15-20 new stores are opened annually. Citi<\/span> takes the view the guidance from Woolworths for a $100 million loss from Masters in FY12<\/span> is conservative, as it assumes a slow ramp-up in stores. Early indications from the Braybrook<\/span> store imply some upside risk.<\/p>\n

\n\tCiti<\/span> assumes Masters will eventually generate sales of $3,000 per square metre<\/span> in its Masters stores, which implies $40 million per store at maturity. This compares to typical sales at a Bunnings<\/span> store of around $4,000 per square metre<\/span>.<\/p>\n

\n\tPost the tour there are no changes in ratings for Woolworths, the FNArena<\/span> database showing four Buy ratings, three Holds and one Sell recommendation. Price targets are also unchanged, the consensus target standing at $27.68. Targets range from $23.50 to $30.00.<\/p>\n

\n\tShares in Woolworths today are higher and as at 2.10pm<\/span> the stock was up 31c<\/span> at $24.57. This compares to a trading range over the past year of $23.70 to $30.18. The current share price implies upside of around 12% to the consensus price target in the FNArena<\/span> database.<\/p>\n

\n\t <\/p>\n

\n\tFind out why FNArena<\/span> subscribers like the service so much: "Your Feedback (Thank You)<\/a>" – Warning this story contains unashamedly positive feedback on the service provided.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"