Making a loss … Masters.Michael Pascoe: Competition quashed at consumers’ expense
The director of Woolworths’ loss-making hardware start-up, Masters, has defended the overly optimistic sales and earnings forecasts set down for its new business, but admitted a failure to understand the hardware business.
Addressing analysts in the wake of Woolworths being forced to blow out its projected losses for Masters in its first five years, CEO Melinda Smith said the company failed to grasp the seasonality of hardware and acknowledged she didn’t know a lot about the structure of the business when it began.
“We didn’t know a lot about this business when we set the budget for financial 2013,” she said.
“We didn’t know a lot about the seasonal curves,” she added. “We didn’t have the right stock in some instances.”
Merrill Lynch analyst David Errington questioned why the market should trust Woolworths’ revised forecasts for its hardware division given it got the basics of its original forecasts so wrong.
“Why are you so optimistic that in financial 2016 you will break even when its been proven that you have been too optimistic … and particularly given that you were overly optimistic in the three most critical parts of retail – sales, gross margins and costs,” Mr Errington said.
“Why should we trust your optimism in this business being break-even in 2016 when you have been proven to be massively overly optimistic.”
Scale of losses
Woolworths said it had forecast Masters to record an EBIT for 2012-13 of a loss of $119 million but that should now blow out to a pre-tax loss of $157 million.
Releasing a statement to the Australian Securities Exchange, Woolworths said the higher losses were due to overly optimistic sales budgets, relatively higher wage costs for new store openings and lower margins due to the sales mix.
Woolworths also announced revised earnings guidance, saying it now expected net profit after tax from continuing operations, excluding non-recurring items, to grow in the range of 5 per cent to 6 per cent, against previous guidance of growth of 4 per cent to 6 per cent.
Woolworths is still forecasting that Masters will break even during financial 2016, assuming more moderate growth in sales per store and improvements in gross margins.
Woolworths expected the losses for financial 2014 not to exceed this year’s levels.
Ms Smith said Woolworths didn’t expect its whitegoods offering to perform strongly as it was a lower-margin category for the retailer.
But she said its joint venture partner in the US, hardware giant Lowe’s, was helpful as it developed the Masters chain and rolled it out but Woolworths faced challenges unique to the Australian market.
“We have a great joint venture partner in America but when its Christmas time over there its also winter, our Christmas time lines up with Spring and Fathers Day so its quite a different seasonal curve.”
Its Danks wholesale hardware business would only record EBIT for financial 2013 of $18 million against an original forecast of $38 million. That meant Woolworths hardware division would post an EBIT loss of $139 million in 2012-13, against a forecast of a loss of only $81 million.
The company said Danks earnings were lower than forecast due to similar problems experiences at its Masters chain, higher levels of competition and subdued trading in the building sector.
Analysts had been questioning lately the true cost of the Masters roll out and the losses it was accumulating for two-thirds owner Woolworths.
Some analysts believe Woolworths could rack up losses of up to $265 million by 2016 as it looks to establish 150 Masters sites around the country.
In its hardware update this morning, Woolworths said there were currently 120 active sites on its books for Masters and at the end of 2012-13, 31 stores were open. 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 this morning to quash any suggestion its one-third partner in Masters, US hardware giant Lowes, was seeking to dump its stake in the Australian business and walk away from 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 2014.
As part of the Masters hardware update, Woolworths also said this morning 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 had agreed to some upside in the future if the business was later sold.
Woolworths said this morning in return for the new deal it would receive payments of $74 million to be booked as income in 2012-13.
As a result of these additional proceeds the loss to Woolworths from the sale of Dick Smith of $65.7 million shown in its half year 2013 results will become a profit of $7.9 million in financial 2013.
Woolworths said when it announced its move into the $40 billion Australian hardware sector in 2010 it said it would take five years from the first store opening for the joint venture to become a profitable division in its own right.
“We are confident that our home improvement business remains on track to be a business that will be built in the first five years and deliver returns in the following years.”
The company said it had learnt from its early mistakes.
”As a greenfield business we expected many challenges and along with our joint venture partner Lowe’s we have learnt a lot over the last two years.”
The original release of this article first appeared on the website of Hangzhou Night Net.