6 facts Woolworths’ shareholders need to know

Last week, the investment community finally got some more ‘colour’ on just how Woolworths’ (ASX: WOW) venture into the home improvement market is tracking. Until now the retailing giant has not split out the earnings performance of the division, making it hard for investors to really analyse the business.

Woolworths’ home improvement division was formed through a joint venture (JV) partnership with the USA-based US$49 billion Lowe’s (NYSE: LOW). The JV is essentially made up of two businesses: Danks, which was purchased in 2009, and the newly created Masters brand. Danks is a leading distributor of hardware and garden products to independent retailers, including those operating under the Home Hardware and Thrifty-Link banners.

The Danks purchase gave the JV immediate scale. Masters is the upstart ‘big box’ style store which has been created to challenge the incredibly successful Wesfarmers (ASX: WES) owned Bunnings chain. It is the large start-up losses from Masters which has some investors worried. Here are six important facts that management disclosed in last week’s market update:

  1. The Australian home improvement market had over $42 billion in sales in 2012 with Bunnings accounting for 16% of those sales.
  2. Management reaffirmed that its strategy, outlined in 2010, that it would take five years from when the first Masters store opened to the JV becoming profitable was still on track.
  3. Total sales in 2013 for the home improvement division were $1.2 billion, split $710 million at Danks and $529 million at Masters.
  4. Losses in 2013 were higher than anticipated. Total losses for the home improvement division were $139 million — $18 million of profit at Danks and $157 million of losses at Masters.
  5. The explanation for higher than anticipated losses were overly optimistic sales budgets, relatively higher wage costs for new store openings and lower gross margins due to sales mix.
  6. Management is forecasting that 90 Masters’ stores will be open by the end of financial year 2016 and that the business will be breakeven at that time.

Foolish takeaway

Renowned investor and founder of Platinum Asset Management (ASX: PTM) Kerr Neilson perhaps summed up the situation best when he said: “Woolworths is showing all the signs of exhaustion. Where do you go now to get market growth? I would hate to be on the board.”  When you have an investor with as much experience as Neilson wary, it would be Foolish to not be a little wary oneself.

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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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