Has the Wesfarmers Ltd (ASX: WES) share price banked in strong growth from the Bunnings UK and Ireland venture too soon?
Who is Wesfarmers?
Wesfarmers is perhaps the leading conglomerate in Australia, owning Coles supermarkets, Bunnings Warehouse, Kmart, Target, Officeworks and more. The company's leading business is Coles, which accounts for the lion's share of sales and the largest amount of group profit.
However, although it is a lesser contributor to profit, many analysts believe Bunnings Warehouse is the company's most valuable business. Virtually unrivalled in the DIY home improvement market throughout Australia and New Zealand, Bunnings can generate enviable profit margins and cash flow for shareholders.
And although Coles is the largest business by sales and profit, it operates in an intensely competitive market with Aldi and Woolworths Limited (ASX: WOW) vying for market share. In recent times, there have been signs that Coles' profit growth may slow.
Aside from Coles and Bunnings, Wesfarmers' department stores, namely Kmart and Target, have their own issues. Indeed, they are staring down Amazon's barrel. The online e-commerce monster has already announced that it will enter Australia and is currently said to be looking for warehouses to establish its network.
Bunnings goes international
In February 2016, Bunnings Warehouse announced its international expansion with the purchase of Homebase department stores in the UK and Ireland. The deal for a network of stores that offered mostly 'decorative' home supplies cost Wesfarmers around $590 million at today's exchange rate.
While Wesfarmers opened its first Bunnings branded store in February 2017, the company plans to invest more than $800 million over three to five years to convert all the Homebase stores into Bunnings Warehouses. The UK home improvement and garden market is said to be worth around $65 billion dollars. However, Bunnings won't be alone in its race to impress customers, with B&Q and Screwfix already worthy competitors.
Foolish Takeaway
At the end of the day, successful investing comes down to the difference between price and value. And with Wesfarmers' UK and Ireland venture still in its infancy, producing a loss and accounting for 3% of sales, it would be unwise to place too much emphasis on the international expansion.
Therefore, with shares trading around 'fair value' I would not be in any great rush to buy shares. However, Wesfarmers is a high-quality company with a track record of savvy management, so it should at least be on long-term investors' watchlists.
