DIY Hardware store Masters is getting another infusion of money as losses mount. Joint owners Woolworths Limited (ASX: WOW) and Lowe's Companies, the second largest DIY home improvement store chain in the US, are estimated to have invested $45 million more into the Masters chain, according to the Australian Financial Review.
Although the Masters business is relatively new, the running costs keep piling up with no profit to date. In the first half of financial year 2015, Masters had interim revenue of $505 million, yet earnings before interest and tax (EBIT) was a negative $112.2 million, falling a further 56.1% from a $71.9 million loss a year ago.
Is Masters a "money pit"?
Just like the non-stop costs and further money injections of a proverbial property "money pit", the 28% increase in Masters' half-year revenue doesn't seem to be getting any traction in making EBIT less of a loss.
Woolworths owns 67% of Masters and the remainder is owned by Lowe's. In the fierce competition with rival retail giant Wesfarmers Ltd (ASX: WES), Woolworths is trying to establish a new income stream like Wesfarmers' Bunnings Warehouse, the market leader in DIY Hardware stores and a lucrative business. Allowing Wesfarmers to get so far ahead in building its DIY hardware chain was a miscalculation on Woolworths' part.
Much needed cost savings to go to Woolworths supermarkets
Announced recently, Woolworths will be cutting as much as $500 million in costs to make its supermarket division more competitive. This is at a time when analysts are projecting a full-year $180 million loss for the home improvement business this financial year. It may be a number of years after the initially estimated 2016, before Masters finally turns a profit.
Woolworths' food and liquor business had half-year revenue up 3.4% to $22.2 billion and same store sales grew 1.7%. Supermarket competition is heating up with the growing Aldi supermarket chain, as well as Costco. A weak Masters could be a distraction if it doesn't add to the bottom line.
Woolworths' strong past earnings growth trend could be affected. Investors who think this situation can turn around may see this as a temporary situation and a buying opportunity, but a long-term view will be needed to justify buying the stock.
