To monitor REH's moat in action, I used to always follow the performance (or non-performance, as was the case) of Reece's major competitor, Tradelink, before Fletcher Building bought it off Crane Group.
Those poor guys for years and years suffered at the hands of Reece.
While - under Fletcher's ownership - we don't get to see Tradelink's financial performance stripped out in detail, there are usually one or two sentences devoted to Tradelink in Fletcher's financial reports.
Somewhat predictably, and sadly, if you are a Fletcher Building shareholder, they don't make for fun reading.
Take for example, the following, from FBU's DH2015 profit report:
"The Tradelink business recorded a 3% decrease in Revenue as a result of market competition in the period. Despite the competitive pressures, underlying margins improved. Tradelink remains committed to its core trade customer based and on growing its market share through targeted customer value proposition. Whilst growth was seen in the commercial plumbing area, an increased emphasis is being placed on the trade plumber, with programs like Customer Service Promise rolled out specifically targeting these customers. Costs continue to be managed in line with trading. A flatter management structure and reduced head office personnel have allowed for investment in more sales people and customer centric activities."
Reads like they didn't get the sales they were after, so they took an axe to the organisation's head office to protect the bottom line. (And remember, this negative sales growth and flat underlying profit (maybe?) occurred at a time when the residential construction and renovation markets were booming, underpinned by rapidly-rising property prices. And even with those strong macro tailwinds, they were still unable to grow.)
By comparison, while Tradelink went backwards at the top-line and maybe treaded water at the profit line during the period, Reece's Revenue and NPAT growth in DH2015 was 9% and 24%, respectively.
A stark difference between the two, to say the least.
Then, 6 months later, this from FBU's FY2016 Annual Report:
"Tradelink reported earnings of $22m, which encompassed a $14m gain from property sales. A 2% like-for-like decline in Tradelink Revenue to $775m followed the strategic reset of its core focus back to the small trade plumber and activity in the market. Whilst a decline was still seen in the trade plumber area, the decline slowed in the second half, with traction gained from initiatives such as the Customer Service Promise launch. This focus is continuing with the launch of a customer loyalty scheme in July and network densification, with 20 new stores planned to be opened in the 2017 financial year"
So, like-for-like sales contracting in a market which is absolutely humming.
And, excluding the profit from the sale of an asset, Tradelink in FY2016 earned $8m in NPAT on $775m of Sales, a 1.0% NPAT margin.
Again, by comparison, Reece's Revenue rose 9.2% to $2.28bn (not sure what the like-for-like figure was, but I doubt if it was anywhere close to zero, because there weren't anywhere near 10% more Reece outlets opened during the period), and NPAT rose 21% to $191m.
Reece's NPAT margin was 8.4% (Tradelink: 1.0%)
But the statement about Tradelink rolling out 20 stores (a big figure in the context of their existing 200 store base) and the general tone of getting their act together and rolling out new initiatives and the network densification (not sure what that is, but it sounds serious), made me think, "Wow. That sounds potentially bad for Reece. Fletcher is clearly throwing a lot of money and effort at getting Tradelink right."
But then, fast-forward 6 months, to FBU's DH2016 profit report:
"In the period, Tradelink has opened 16 new branches, improved gross margins, launched a unique customer service proposition, driven targeted SME sector growth initiatives and rationalised overhead cost structures to enable future top-line and earnings growth."
Followed, disappointingly for FBU shareholders, by the almost inevitable:
"This positive momentum was, however, impacted by market declines in Western Australia and South Australia, which led to Tradelink's revenues being flat year on year."
Again, by comparison, Tradelink's flat revenue outcome once again lagged Reece's 6.1 % rise. (And we know that Reece also operates in Western Australia and South Australia.)
My interpretation of what is happening at Tradelink (remember, this is the number 2 player in the industry) is that it is a business that is squirming. It is trying all sorts of things, including spending a lot of money, but is just not able to gain any traction in the market.
I mean, if Tradelink can't even make any money when things are absolutely booming, what is it going to look like for them when the downturn inevitably comes, either next year or the year after?
It's going to be sheer carnage.
A year ago, there were reports of Tradelink spending $10m on growing:
To me, all the signs are that Reece has got its foot firmly on the Tradelink throat and is squeezing the life out of it.
When FBU finally capitulates and gets rid of Tradelink, my call is that Reece will experience a one-off fillip in sales as a result of the closure, by the new owner, of the many loss-making Tradelink stores.
(20min delay)
