Confession day for Woolworths (WOW), with the country’s biggest retailer finally giving in to mounting pressure from analysts and shareholders and revealing the size of the losses its Master’s hardware adventure is racking up.
And the news wasn’t pretty – the losses are growing, with another $157 million for the year to June 30, 2013, with a similar-sized loss forecast for the current financial year.
Two thirds of that loss falls to Woolies (the rest will be borne by the one third partner in Lowe’s of the US, that country’s second ranked hardware chain).
Investors went ‘yuk’ and sold down the shares by around 2%, falling 61c to $33.08. They later recovered to end down 1.1% or 37c at $33.22.
WOW 1Y – Woolies losses mount in its hardware gamble
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Woolworths said yesterday in a market update that it had forecast the Masters business would record a loss on an earnings before interest and tax basis for 2012-13 of $119 million. Instead, the figure will now be a pre-tax loss around $157 million.
Woolworths said the higher losses were due to overly optimistic sales budgets, relatively higher wage costs for new store openings, lower margins due to the sales mix and the subdued retailing environment, especially for building and construction products and materials.
Woolworths is still forecasting however that Masters will break even during the financial 2016 year, assuming more moderate growth in sales per store and improvements in gross margins.
It said it expect the losses for the 2013-14 financial year not to exceed this year’s levels. This means the business will have a fat cushion of tax losses to offset against profits, when they start appearing.
To offset this bad news (which has been suspected by an increasing number of analysts and big shareholders for some months), Woolies lifted its profit guidance for the 2012-13 to a rise in net profit of 5% to 6%, instead of the slightly wider range of 4% to 6%.
The hardware business has two parts – the developing green fields Master’s ‘big box’ operation and the existing Danks wholesale hardware business which markets to the building trades.
Woolies said in yesterday’s statement that Danks would only record EBIT for financial 2013 of $18 million against an original forecast of $38 million. Oops!
Woolies said Danks earnings were cut by the same problems experienced by the Masters chain: higher levels of competition and subdued trading in the building sector.
This means Woolworths’ hardware division would post an EBIT loss of $139 million in 2012-13, against a forecast of a loss of only $81 million.
Woolworths yesterday maintained the target of 150 new Masters ‘boxes’ around Australia by 2016.
Woolworths Limited – WOW Market Update
In its hardware update Woolworths said there were currently 120 active sites on its books for Masters and at the end of 2012-13, 31 stores were opened.
But due to the timing of approvals and construction the number of store openings in the first quarter of 2013-14 would be lower than the recent run rate.
Woolworths also moved to quash any suggestion its one-third partner in Masters, US hardware giant Lowe’s, was seeking to exit the partnership.
Woolworths said Lowe’s had decided to extend the first exercise date of their put option (which would force Woolworths to buy them out) for another 12 months to October next year.
"Sales for the Home Improvement division in FY13 were $1.239 billion, up 49.6% on last year – Danks $710 million, up 4.1% and Masters $529 million, up 262% on a 53 week basis," Woolies said (releasing the first details of its 2012-13 sales performance well ahead of time yesterday).
As part of the yesterday’s update, Woolworths also said it had agreed to release private equity firm Anchorage Capital Partners from its obligation to deliver Woolworths any upside resulting from the future sale of electronics group Dick Smith.
Woolworths sold Dick Smith to Anchorage last year and agreed to some upside in the future if the business was later sold.
Woolworths said yesterday that in return for the new deal it would receive payments of $74 million to be booked as income in 2012-13.
That means the loss to Woolworths from the sale of Dick Smith of $65.7 million in its half year 2013 results, will now become a profit of $7.9 million in the full financial 2013.
