Woolworths (WOW) indulged in a nice example of spin yesterday, separating the long tipped bad news update on the costly foray into hardware from the annual profit and sales report at the end of the month.
And because more red ink was expected from the Masters hardware joint venture with Lowes, the US Number 2 in the sector – the market didn’t panic when it saw that the business remains off the rails, with losses and break even estimates missing guidance.
And to keep investors calm, the big message from the announcement going forward was the news that Woolies is hauling back on its expansion plans to allow the existing stores to settle down and start performing.
Woolworths says it will now open fewer Masters stores over the next two years and will not reach its 90-store target by the end of 2016. It has so far opened 49 Masters outlets.
The retailer says it now plans to open around 10 to 15 Masters stores a year for the next few years, adding to the existing base of 49 stores.
Woolies shares eased 0.3% to $35.74 and that was probably the outcome the company wanted to see.
WOW 1Y – Woolies pulls the reins on Masters
In the hardware trading update yesterday, Woolworths said its home improvement business lost $169 million in the 12 months ended June 30, topping losses of $138.9 million in 2013.
Losses from the Masters big box stores rose to $176 million from $156.6 million, while profits in the Home Timber & Hardware business fell to $7 million from $17.7 million.
Masters sales rose 42% to $752 million and Home Time & Hardware’s sales rose 9.2% to $775 million, for a total increase of 23.2% to $1.5 billion.
Woolies says it is now looking to boost sales from the 49 Masters stores open to $1.5 billion.
And this was in a year when Bunnings (which reports later this month in the Wesfarmers release) has already reported double digit growth for the first nine months of the year.
And, to make the performance look worse, the weak performance was in the midst of a rather large home building and renovation boom.
Woolworths had previously advised the market that losses in 2014 would be no greater than those in 2013, a proposition that a number of investment analysts took issue with.
No doubt there will be a string of ‘told you so’s’ to Woolies management in coming days after the update.
Woolworths has also backed away from its forecast that the home improvement business would break even during 2016.
Just when that would happen was left unanswered in the statement yesterday.
"We are disappointed we will not reach this guidance," chief executive Grant O’Brien said in the statement.
"However, we were right to set challenging targets for the business and will continue to set stringent internal hurdles for the Home Improvement business.
"We remain confident that the Home Improvement business will be a material profit contributor for Woolworths and will deliver an acceptable return on investment," he said.
The Woolies statement begs two questions, the first being with the loss 21% more than guidance, should Woolies have revealed it sooner than it did? And if Woolies could compile the figures for its hardware business, why not the rest of the company?
The answer to the first question is, yes it could – it’s five weeks since the end of the financial year. And the answer to the second is that Woolies wants clear air for the good news later this month – the 2013-14 sales and earnings (and no doubt a higher dividend to keep shareholders happy).
But regardless of the questions and answers, it is clear the hardware push is proving to be harder than Woolies management and board thought. This is a big strike against CEO Grant O’Brien.
