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Woolworths and Lowes still in the hardware game

The joint venture between Woolworths (ASX: WOW) and US-based Lowes Companies (NYSE: LOW) to launch the Masters hardware stores looks set to continue for the time being at least, according to a report in the Australian Financial Review. The new kid on the home improvement block, Masters opened its first store in September 2011 and has since rolled out 29 stores.

The market is watching anxiously to see how the decision to go head-to-head with industry giant Bunnings, owned by Wesfarmers (ASX: WES) will turn out. Last year Bunnings had revenues of over $7 billion and earnings before interest and tax of $841 million. In comparison, Masters is forecast to have revenue approaching $900 million in financial year 2014 but to lose close to $100 million. Profits are not forecast by most analysts until at least 2017, highlighting the inherent risks in building the retail chain from scratch.

Wholesaler Metcash (ASX: MTS) is not wanting to miss out on its piece of the hardware pie either. Metcash purchased hardware retailer Mitre 10 in 2012 in response to the move by Woolworths into hardware — and no doubt after viewing the impressive growth and profitability of the Bunnings chain. Metcash’s hardware distribution division had revenues of $830 million and profits before tax of $21 million in 2012.

Foolish takeaway

There is obviously good reason for Woolworths to have set up the Masters business and to attempt to take market share from Bunnings, no doubt it will continue to grow revenues and eventually turn a profit. However the question for investors is whether ultimately the Masters business can produce an adequate return on invested capital.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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