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Woolworths: Hardware will take time

All long-term investors know that patience is one of the strongest virtues of a successful investor.

And that’s exactly what Woolworths (ASX: WOW) is asking shareholders to do when it comes to its hardware venture with US giant Lowe’s. Woolworths currently has 36 home improvement stores open is aiming to have 90 stores open by the end of the 2016 financial year.

Chairman Ralph Waters says Woolworths and is joint-venture partner Lowe’s were building the home improvement business from scratch rather than spending millions of dollars buying an existing business. ‘If we bought an existing business we have paid hundreds of millions of dollars in goodwill’, he said. ‘The cumulative losses of the first few years represent the goodwill we have paid otherwise closing, with the losses being tax-deductible.’

According to the Australian Financial Review, the Masters home improvement business lost $139 million in 2013, and is forecast to make similar losses this year. Mr Waters says Masters will become profitable in 2016, five years after opening the first store. Woolworths plans to open a total of 150 stores around Australia.

Masters is competing against Bunnings – which is owned by Wesfarmers (ASX: W ES). Bunnings is also ramping up the rollout of new stores, as it attempts to take the wind out of Masters’ sails before it can get going. Of course, both hardware companies are also up against the Metcash (ASX: MTS) owned Mitre 10 stores, as well as the many individually-owned hardware stores around Australia.

Looking at its growth strategy, Woolworths has also announced the acquisition of New Zealand based Ezibuy, a leading direct retailer of apparel and homewares in Australia and New Zealand. The company says that Ezibuy will accelerate the growth of Woolworths’ online and multi-option business. The company says it is on track to hit more than $1 billion of online sales in the 2014 financial year.

Mr Waters also defended the sale of the Dick Smith consumer electronics business. He said it was a non-core business and was better off in new hands, and he wished the IPO every success.

Foolish takeaway

Woolworths began expansion into the home improvement sector as a long-term business move. Shareholders should see the benefits of this strategy play out over the long-term much like the company’s expansion into the hotel and liquor industry.

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Motley Fool writer/analyst Mike King owns shares in Woolworths. You can follow Mike On Twitter @TMFKinga

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