The future of Woolworths’ $3 billion home improvement business is under a cloud after its chief architect and biggest supporter Grant O’Brien announced plans to retire as chief executive, leaving the door open for his successor to convince the board to pull the plug.
Mr O’Brien reaffirmed Woolworths’ commitment to the Masters and Home Timber and Hardware chains a month ago, saying the rationale for entering the $45 billion home-improvement market was just as valid today as it was in 2009, when Woolworths unveiled plans to take on market leader Bunnings by opening a chain of big-box hardware stores.
The business is draining about $400 million in cash from the company each year.
Credit Suisse analyst Grant Saligari
Mr O’Brien and chairman Ralph Waters defended the strategy again on Wednesday, saying Masters will eventually deliver value for Woolworths shareholders.
Woolworths Masters chain is losing $200 million a year and is not expected to break even until 2019.
Woolworths Masters chain is losing $200 million a year and is not expected to break even until 2019. Photo: Glenn Hunt
However, Mr Waters conceded that a new chief executive would be free to review all aspects of Woolworths’ strategy, including portfolio investments such as Masters and the underperforming BIG W chain.
“In the fullness of time a new CEO will get to understand what is trying to be achieved with Masters and how much progress has been made and will come to his own conclusions,” Mr Waters said.
“In Australia there is a great urgency for returns we don’t notice overseas. Our overseas partner (Lowe’s) is very comfortable with the time it will take to turn this into a long-term profitable business,” he said.
“We think in the fullness of time we will have an extremely viable home-improvement business under the Masters chain. It requires patience and it requires patient capital.”
Woolworths has invested more than $2 billion into home improvement and its US joint venture partner Lowe’s $1 billion, taking their total investment to date to $3.07 billion.
Racked up losses
However, the business has racked up losses of $500 million over the past three years and is not expected to break even until 2019 or 2020.
Lowe’s has a put option to sell its 33 per cent stake to Woolworths after October 2016.
Woolworths hired a British-based hardware expert, Matt Tyson, to run the business 16 months ago and has been tweaking the Masters strategy, adding new products and changing store layouts to boost sales.
Woolworths is also reducing the capital allocated to Masters by $600 million over the next three years and plans to open only four new Masters stores a year, compared with 10 to 15 previously.
“We have a very clear plan and Matt has a very clear plan and that’s got to be given time to prove the concept,” Mr O’Brien said. “The early signs are good.”
Home-improvement sales rose 19.8 per cent in the fourth quarter to date, with Masters sales up 17.7 per cent. However, Masters sales per store are less than $18 million a year, well below the $30 million analysts estimate is needed to break even.
“The business is draining about $400 million in cash from the company each year,” Credit Suisse analyst Grant Saligari said.
Analysts and investors believe the 50-store Masters chain would be attractive to private equity buyers, which could merge it with rivals such as Metcash’s Mitre 10.
In a report in April, Citigroup analyst Craig Woolford estimated 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. However, Woolworths stood to recoup at least $700 million and as much as $970 million selling sites and stock, so the net loss would be between $300 million and $900 million.