The Wilcon Depot Boom: A Beneficiary of Government-Induced Inflation?

The Wilcon Depot Boom: A Beneficiary of Government-Induced Inflation?

2022 was a bonanza year for retail-listed firm Wilcon Depot even as inflation went on a rampage. Has the company benefited from inflation?

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The purpose of this terse analysis of the financial performance of Wilcon Depot [PSE: WLCON] is to observe the estimated state of the domestic consumers, as well as the conditions of the retail side of the property and construction industries.   

WLCON has been the first among the elite PSEi 30 members to publish their annual report. 

Philstar.com, March 3: Wilcon Depot Inc. reported a double-digit profits growth last year, driven by resumption of private construction activities even in the face of a brutally-high inflation. The listed home improvement and finishing construction supplies retailer netted P3.85 billion in 2022, up 50.2% year-on-year, according to a disclosure to the stock exchange Friday. In the final quarter of last year, figures showed Wilcon’s bottom-line jumped 28.3% on-year to P888 million.

 

Figure 1

WLCON registered its second year of over 20% net sales growth. (Figure 1, topmost chart)

Meanwhile, Q4 (YoY) sales clocked in a fiery 18.5% but slower than the 32.6% in Q3 (YoY). (Figure 1, middle chart)

However, WLCON’s quarter-on-quarter sales growth rate slipped to .8% in Q4 from 5.9% in Q3 and 8.35% in Q2. (Figure 1, lowest window)

So at a time when consumers were supposed to open their wallets to celebrate the holiday season, and as credit card usage bulged, Q4 sales (in peso) barely increased from Q3.

Have the sales boom hit a wall?

Figure 2

Actually, the “brutally high” inflation regime seems to have benefited WLCON.  

Three reasons:

One, sales rose along with the CPI from 2020 to 2022. (Figure 2 topmost chart)

Two, profit margins expanded despite the high inflation, suggesting that the company had been able to more than pass through higher input costs to their clients.  According to their annual report, sales grew by 22%, while the cost of sales increased by 18.6%. Moreover, profit margins spiked in all quarters of 2022, resonant with the CPI.   (Figure 2, middle window)

Three. Since their customers are primarily from the high-to-middle class, WLCON must have also benefited from the explosive growth of credit cards.  The double-digit growth of credit cards YoY in all the quarters of 2022 juxtaposed with the upsurge in WLCON’s sales.  (Figure 2, lowest pane)

The credit card boom represents one of the principal sources of rising prices. 

Figure 3

But there has been another twist.

Like sales, eps growth appears to be tapering in the face of faster interest expense growth.  Curiously, the company has no debt.

Lease contracts are likely the source of their interest expenses.  Or, they might have tacked debt into lease liabilities.  

Meanwhile, Q4 (YoY) earnings (eps) grew by a dazzling 37.5% but slower than 80% in Q4. In peso terms, Q4 eps dropped to the Q1 2022 level.

On the other hand, lease liabilities grew by a still torrid 27.3% in Q4, down from 32.5% in Q3.

With an eps of .94 in 2022, WLCON has a PER of 33.56, as of March 3rd.

So there you have it.  

Wilcon Depot seems to have benefited immensely from the inflationary and redistributional effects of bank credit and the BSP’s liquidity expansion.

It should be interesting to see how the company performs when the consumer cuts back on credit cards for a variety of reasons, such as overleverage, job or income losses, higher debt servicing costs, a combination of the above, and others. 

“Resilient” consumers?