With the General Election having failed to derail the property market, shares in Travis Perkins now trade at an all-time high as investors scramble for a slice of the builders' merchant. This may be a surprise if you consider what part of its business does.
A big chunk of Travis' business comes from a sector in decline. The DIY fad that spawned a monster of awful TV 'fixer-upper' shows with Andy the Tool Man and self-proclaimed textile expert Kirstie Allsopp is in decline. Travis owns one of the UK's biggest DIY chains, Wickes, so shouldn't it be struggling?
Wickes has suffered from declining sales volumes and the consumer shift from 'do-it-yourself' to 'do-it-for-me'. The latter is naturally playing into Travis' other divisions as plumbers, builders and roofers use its tradesman stores including CFF, Benchmarx and PTS more frequently. Yet that doesn't get past the fact that Wickes has been a drag on the wider group.
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Chief executive John Carter is the first to admit the acquisition of the DIY chain for £950 million in 2004 was ill-timed and over-priced. The division's trading profit fell in four of the first nine years of ownership. In 2013, Travis started a turnaround plan, focusing on clear pricing, a broader range of products and a multi-channel approach.
Wickes is now mainly targeted at trade and the serious DIY fan. Sales volumes are picking up, but this is partly to due with cutting prices and being more aggressive with marketing. These tactics are not good for profit margins.
Irish stockbroker Davy says this pricing strategy is prevalent across the industry with similar strategies being adopted by B&Q-owner Kingfisher and Homebase. It poses the question: is this "a minor graze or the cut that will not stop bleeding?". Davy says there is evidence to suggest we are entering a period of "price investment" – price cuts to you and me.
Carter last year said the solution for Wickes was to "fix it or sell it". A sustained increase in sales volumes would certainly make it look attractive to a buyer.
While Wickes gets all the publicity, it is worth noting that the business accounts for only a fifth of group profits. Its biggest profit earner is the general merchanting division which covers the Travis Perkins and Benchmarx trade-focused brands. In the plumbing and heating division, Travis is repositioning the business away from heating and towards the more profitable bathrooms segment.
"We are convinced that Travis Perkins has significant potential for self-improvement," says investment bank Liberum. "Management expects improved returns to be driven partly by increased market share, in all divisions. It is targeting share gains from outperforming market growth as well as space opening."
Liberum is confident that UK residential "repair, maintenance and improvement" work is at the start of a multi-year "up-cycle". It concludes: "British houses are old and have not been well maintained. Consumers are starting to recognise the need for improvement and have increasing appetite and confidence to carry it out." Whether they do it themselves, or use a tradesmen, Travis can provide the equipment.
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