Description

CERTAIN STATEMENTS CONTAINED HEREIN REFLECT THE OPINION OF THE AUTHOR AS OF THE DATE WRITTEN. NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT. YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. Please see additional Important Disclaimers at the end of this analysis.

Background

Wickes is an off-the-beaten-path spinoff of an unsexy, unloved, and underinvested business. It was previously a small non-core division of Travis Perkins (TPK), which one can think of as the Home Depot of the UK. The division lacked strategic fit and didn’t move the needle financially, so TPK did what is commonly done in these situations: it let the business stagnate, deprived it of growth capital, and then kicked it to the curb in a spinoff. [1]    

And so the business sits in the eyes of the market: a tiny market cap of no interest to large institutional investors; an uninspiring franchise of no interest for quality-oriented investors that rule the day; cyclical earnings amidst weakening economic conditions, untouchable to those who won’t step in front of downturns or tolerate volatility; softening near-term trends, filtering out momentum-oriented algorithmic strategies; zero catalysts, eliminating hedge funders that measure success in quarters; sleepy aspirations in an unexciting industry, chopping off growth investors, thematic traders, macro shops, special situation funds, et al. The list goes on.

So who does this leave? The few and far between who gravitate toward underappreciated IRR potential over undeterminable time horizons from it’s-not-THAT-bad securities stepped over by everybody else. Especially those raised in the Greenblatt school of seeking out unloved cash generative businesses with high returns on tangible capital and low multiples of earnings.    

Overview

The Wickes brand was born in 1854 in the U.S., when Henry Dunn Wickes and his brother started a small operation in the local timber business in Michigan. During the American property boom of the mid-1950s, the Wickes brand developed into a one-stop shop selling construction materials to builders. In 1972 the company crossed the Atlantic and set up a location in the UK, which became its main market. Over the years, Wickes grew its store network in the UK and underwent a change of ownership in 2000, then another in 2005 when it was acquired by TPK. In 2021 Wickes demerged from TPK to become a standalone company.

As reported in their 2022 Annual Report and Full Year 2022 results, Wickes has 230 stores in the UK with about 8k employees. It operates as a home improvement retailer with a strong private-label offering, with revenue split across three customer segments: local trade, do-it-for-me (DIFM), and do-it-yourself (DIY). This split across distinct customer propositions creates a balanced business model and flexibility to target faster growing sectors in the market, as well as resilience to fluctuations in consumer trends. Key growth levers such as digital development, trade professional accounts, white space catchments, and store refits are relatively immature and should continue to drive revenue growth in the coming years.[2]

Store refits in particular have been key to improving unit economics and customer experience:

This has driven increased sales densities and overall market share:

Wickes has also seen success in building its trade professional accounts (TradePro):

While not central to the investment case, we believe the business also benefits from underlying market drivers on top of these company specific initiatives. For one, the market itself grows roughly in line with GDP over time. The UK home improvement market has grown at an average of 2.5% p.a. for the last-ten years.[3] This is expected to continue due to a rising number of UK households and increasing home ownership, an old housing stock with an average age of 65 years, investment in building renovation to reduce energy costs, and more time being spent in homes and gardens as a result of hybrid working. It’s also worth highlighting that Wickes has very little exposure to newbuild construction, which is more cyclical than RMI (repair, maintenance and improvement). 

Management targets mid-single digit revenue growth through the cycle from new store openings and share gains on top of these market growth drivers. This should enable positive operating leverage with  increased sales densities against stable occupancy costs and overhead.

Wickes’ profitable business model also generates strong cash flow, which is being deployed across a range of reinvestment opportunities such as store refits, new store expansions, and digital development. Management has already refitted 70% of the store network. They’ve also invested in machine-learning data analytics, for example with the company’s new Missions Motivation Engine, as well as technology that enhances multi-channel order pick and dispatch. 25k sq. ft. of new fulfillment capacity has been added across 28 stores, which supports 5k more digital customer orders per week. New handheld technology is driving faster picking speeds and service levels, with customers now able to click and collect items in 30 minutes. The brand is also being reinforced through new product launches. For example, Wickes recently launched new light bulbs and garden power tools. They also repositioned, rebranded, and relaunched Wickes’ ready-to-fit range of Wickes Lifestyle Kitchens, which now includes virtual design advice. Management also launched eBay marketplace and Klarna to appeal to younger (and female) customers. And importantly, 2022 marked the company’s first new store opening in three years, which is the first of 20 openings planned for the next 5 years.

Management is also shareholder friendly, with a policy of returning capital via dividends. The balance sheet is strong, with a target of remaining under 2.75x lease-adjusted net debt / adjusted EBITDA. Below this level, management intends to return surplus cash via special dividends or share repurchases.

Valuation

The shares trade at about 3.5x trailing adjusted EV/EBIT (adjusted for leases and one-off charges). If one haircuts trailing adjusted EBIT by roughly 25% to estimate normalized earnings, that would imply a through-cycle EBIT of about 55m. With a 7x multiple – reasonable given high incremental returns on capital, ample reinvestment opportunities, and at least low-single digit growth prospects – the enterprise value would be 385m. Add about 100m of net cash and the implied equity value is 485m, or call it half a billion. For reference, the business was valued in the range of 600 – 700m when it spun out of TPK, so we may be in the right ballpark. 500m equity value compares to the current market cap of about 360m, a 30% discount give or take. Plus a nice dividend while one sits.

Important Disclaimers

The provision of this report does not constitute (and should not be construed as) a recommendation, financial promotion, investment advice, encouragement or solicitation to buy, sell, or hold the security of the subject issuer (the “Security”), or any other securities, discussed herein. This report is for informational purposes only. All of the information contained herein is based on publicly available information with respect to the security and the author’s analysis of such information. Past performance is no guarantee, nor is it indicative, of future results.

Certain statements reflect the opinions of the author as of the date written, may be forward-looking and/or based on current expectations, projections, and/or information currently available. The author cannot assure future results and disclaims any obligation to update or alter any statistical data and/or references thereto, as well as any forward-looking statements, whether as a result of new information, future events, or otherwise. Such statements/information may not be accurate over the long-term. The views are those of the author acting in his individual capacity and not as a representative of the firm.  The author’s opinions on this Security may change at any time in the future and the author will not, and disclaims any obligation to, update this report to reflect any change in opinion. The author further disclaims any obligation to respond to any comments or questions posted regarding the Security discussed herein.

NO INVESTMENT DECISIONS SHOULD BE BASED IN ANY MANNER ON THE INFORMATION AND OPINIONS SET FORTH IN THIS REPORT.  YOU SHOULD VERIFY ALL CLAIMS, DO YOUR OWN DUE DILIGENCE AND/OR SEEK ADVICE FROM YOUR OWN PROFESSIONAL ADVISOR(S) AND CONSIDER THE INVESTMENT OBJECTIVES AND RISKS AND YOUR OWN NEEDS AND GOALS BEFORE INVESTING IN ANY SECURITIES MENTIONED. AN INVESTMENT IN THE SECURITY DOES NOT GUARANTEE A POSITIVE RETURN AS STOCKS ARE SUBJECT TO MARKET RISKS, INCLUDING THE POTENTIAL LOSS OF PRINCIPAL.

The author or his or her respective employer or employer’s clients, affiliates, officers, managers, directors, and other associated parties, may or may not hold positions in the Security noted in this article. These parties may trade at any time, without notification to this community, and will not disclose this information to this community. The author and his employer disclaim any liability for investment losses that you may incur under any circumstances.

Catalyst

None.