It sounds like it was a case of ‘trust us, we are Woolworths, we know what we are doing’ on two counts from the retailer’s chairman at yesterday’s annual meeting.
First he was pressed on the lack of positive news from the company’s move into hardware, second was the looming sale of Dick Smith by its private equity owners for a fat profit, around 23 months after it was snapped up from Woolworths (WOW) for less than $100 million.
The Masters joint venture with US hardware giant Lowes Cos is a longer term irritant and hasn’t impressed a lot of the company’s investors, large and small.
Losses are being racked up as the expansion to around 150 mega mall sized stores continues.
It lost $139 million in the year to June and is on track to lose a similar amount this financial year. Break-even is still several years away.
Woolies’ chairman Ralph Waters defended the move and urged shareholders to be patient about the Masters venture, forecasting that it will eventually break even or make a profit in 2016.
Mr Waters said Woolworths and partner Lowe’s were building the home improvement business from scratch, rather than spending hundreds of millions of dollars buying an existing business.
"If we bought an existing business we’d have paid hundreds of millions of dollars in goodwill," he told the AGM.
"The cumulative losses of the first few years represent the goodwill we’d have otherwise paid." The losses were tax deductible.
Mr Waters said the home improvement market was worth $42 billion a year and market leader Bunnings (owned by Wesfarmers, which also owns rival retailer Coles, Kmart, Target, etc) accounted for only 16% of the market.
He said that allowed Woolies scope to expand into a sector where it would not be constrained by competition rules, as it is in retailing, supermarkets and liquor.
" I’d urge you to have patience and confidence in our past record," Mr Waters said. "In five years time well have a decent sized business."
WOW YTD – Woolworths urges patience with Masters
And Mr Waters was just as defensive on the decision to sell Dick Smith for only $94 million to private equity. He told the meeting the chain was sold because it was a non-core business and was better off in new hands.
There’s been a smattering of criticism of the decision to quit the business last year with the private equity owners floating the business shortly with an implied value of more thas half a billion dollars.
As a result, some shareholders and analysts have claimed Woolies management and board left value on the table because it sold Dick Smith too cheaply
Mr Waters said that If Woolworths had known that the Australian dollar was going to fall from around US 1.05 to US 92c – reducing the impact of deflation – it might have had second thoughts.
"We made a clear decision and we made the quickest and cleanest exit we could," he said.
"We wish that IPO every success."
In other news, Woolworths has confirmed that long time finance director Tom Pockett will retire in February and from the board in July after an 11-year career with Australia’s largest retailer.
Woolworths said Mr Pockett will be replaced by general manager corporate finance David Marr who has been in senior roles for two years as part of the retailers succession planning.
Woolworths shares ended up less than 1% at $34.18.
And rival retailer, Harvey Norman (HVN) also held its AGM in Sydney yesterday and shareholders were told that any post-election bounce has passed by the retailer without being noticed.
"We were expecting after the election there might be some huge jump but there wasn’t," CEO Katie Page told the meeting.
Several measures of consumer confidence (the Westpac Consumer Sentiment survey) and spending have shown improvements since the September 7 poll, and Harvey Norman is the latest big retailer to say that it has not benefited its business. Woolworths and Coles have also said they haven’t seen any bounce.
The electronics and furniture retailer is hoping for a stronger Christmas period. "We’re all hoping for a great Christmas but every retailer is always optimistic for Christmas," Ms Page said.
The shares rose 1.7% to $3.275 at the close yesterday.
