The leap into hardware retailing by Woolworths Limited (ASX: WOW) still appears sensible on the face of it when viewed through the prism of Bunnings.
Bunnings, the market-leading hardware chain owned by Wesfarmers Ltd (ASX: WES) continues to report first-class results. For the first half of the 2014 financial year revenues at Bunnings jumped 10.4% to $4.4 billion, earnings before interest and tax increased 8.5% to $562 million, with return on capital an outstanding 25.5%.
With figures like these it really is no wonder that Woolworths' management decided to enter the hardware business and create the Masters Home Improvement brand. However, what is surprising to many is that Woolworths has had such a tough time creating a profitable business.
An article in the Sydney Morning Herald (SMH) has drawn investors' attention to the fact that the clock is ticking on the joint venture (JV) aspect of Masters. Currently, Masters is a joint venture between US-based home improvement giant Lowes and Woolworths, however in October this year Lowes has the right to force Woolworths to buy it out of the JV which according to the SMH could cost Woolies up to $800 million.
What should investors make of all this?
The losses from Masters continue to grow and while Woolies' management is sticking to guidance that the business can reach break-even by 2016, a departure by Lowes would at the very least suggest the US firm doesn't hold out much hope for the long-term profitability of Masters.
