Hammered: Woolies owns up to Masters misstep

“Too ambitious” and “too optimistic” sums up Woolworths’ miscalculation of the size of the losses for 2013 in its foray into the $42 billion home improvement industry.

The cost blowout pushed the supermarket giant’s share price lower despite an overall upgrade to total net profit after tax to 5-6 per cent, up from a previous guidance of 4-6 per cent.

Since Woolworths announced it would enter the home improvement business in 2010 and take on the Bunnings juggernaut, it has taken a lot of stick. The size of the losses in 2013 and a warning that losses in 2014 were not expected to “exceed this year’s level” is unlikely to quell concerns.

It is not hard to see why. The total loss for the home improvement division was $139 million in 2013, 71 per cent worse than the company had anticipated. This comprised a $157 million loss from its start up business Masters, which it had forecast would be a loss of $119 million, and a lower-than-expected profit from Danks of $18 million.

However, investor concerns would have intensified if it hadn’t been able to retain Lowe’s as a joint venture partner in its $2 billion Masters hardware play.

Earlier this week it emerged that Lowe’s had extended a put option to sell out of the partnership until October 2014. There has been a lot of speculation that Lowe’s would withdraw from the partnership as the US giant faces its own challenges in its home market.

Woolworths went to great lengths on a conference call today to talk up the benefits of the relationship with Lowe’s. The supermarket giant’s chief financial officer Tom Pocket said Lowe’s had been very accommodating extending the put option and was committed to the joint venture.

But the reasons for the ballooning losses, including “overly optimistic sales budgets”, higher wage costs for new store openings and lower gross margins due to the sales mix, didn’t inspire confidence that they will pull off a promise that the business would break even in 2016.

Besides updating the market on its home improvement business, it revealed it had renegotiated a deal with private equity group Anchorage, which bought Dick Smith from Woolworths in 2012 for $20 million plus a promise to give Woolworths a proportion of any future profit growth.

Woolworths said it had “released” Anchorage from this obligation in exchange for $74 million, which consists of $50 million in June 2012 and $24 million in 2014.

The upshot, is a loss on the sale of Dick Smith of $65.7 million reported in the first half would now become a profit of $7.9 million for the full year. This brings the total sale of Dick Smith to $94 million.

Anchorage would no doubt be doing high fives on this new deal. When it bought the business last year it was generating more than $1.5 billion in revenue and a pre tax profit of $24 million. The price included all assets and off balance sheet leases. At the time it was speculated that that the inventory tallied up to $250 million.

The original release of this article first appeared on the website of Hangzhou Night Net.

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