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Woolworths forced to revamp Masters stores as losses grow

Masters inside store

Woolworths has decided to refurbish its two-and-three-year old Masters home improvement stores in an attempt to grow sales and curb growing losses, which grew to $245 million in 2015, dragging down earnings across the entire group.

Home improvement managing director Matt Tyson, who took the helm in January last year, said a new Masters format was showing encouraging results, generating sales 30 per cent higher than the original format.

Masters currently has nine stores trading under the new format, which features new layouts and a wider range of products and brands, including Honda lawn mowers and Sherwin-Williams paint. It hopes to retrofit about half its 58 stores by the end of 2016.

"It's early days, but I'm optimistic about the progress that's been made and I'm optimistic we can make a real difference in 2016," said Mr Tyson.

However, analysts were less optimistic, saying sales per store would have to rise 50 per cent to 100 per cent before Masters stores broke even.

Losses at Masters blew out from $176 million in 2014 to $245.6 million on sales of $930 million in 2015, while profits at Home Timber and Hardware rebounded 198 per cent to $20.9 million, boosted by recent  acquisitions.

Total losses from home improvement, a joint venture with US retailer Lowe's, rose from $169 million to $224.7 million, taking the red ink spilled over the last four years to more than $600 million.

While Masters continues to struggle, Wesfarmers' Bunnings is powering ahead, lifting sales by $1 billion to $9.5 billion in 2015 and cracking the $1 billion profit mark for the first time.

Woolworths is under pressure to sell or liquidate the business, which is not expected to break even until 2019 or 2020.

Outgoing Woolworths CEO Grant O'Brien defended the progress at Masters, saying new-format stores were resonating with customers.

"Customer numbers are up, transactions are up ... we need to give the format a chance to deliver and provide some real competition," said Mr O'Brien.

Outgoing chairman Ralph Waters refused to take responsibility for the losses, saying the decision to expand into home improvement was made before he joined the board in 2011. But he defended the investment, saying Woolworths had the courage to invest in new growth businesses.

"I'm yet to be convinced there's not an opportunity here for this business," Mr Waters said. "I suspect some years down the track this will be a thriving business and people will look back and wonder what all the news was about."

"The Woolworths board did have the courage and it gets beaten up for showing that courage every day."

Woolworths also defended its decision not to write down the value of the home improvement business, which is in the books at $2.8 billion, saying it regularly reviews valuations, which are based on discounted cash flow assumptions.

Woolworths is reducing the capital allocated to Masters by $600 million over the next three years, redirecting resources to its grocery business.

Citigroup analyst Craig Woolford estimates it would cost Woolworths $1.6 billion to exit Masters, including the cost of clearing inventory, exiting leases and buying the Lowe's put option. Woolworths could recoup as much as $970 million selling sites and stock, so the net loss would be between $300 million and $900 million. 

Source: Sydney Morning Herald.

Read more: 

07 September 2015

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