What: On Wednesday this week, the US-based Home Improvement retailer Lowe's Inc reported its first quarter sales and earnings results.
The headline results for Lowe's were great with quarterly sales up 5.4% to US$14.1 billion and diluted earnings per share up an impressive 14.8%. For shareholders in Lowe's there wouldn't appear to be much to worry about, however, buried in the release is also one line which is of great importance to shareholders of Woolworths Limited (ASX: WOW).
That line is "Loss on equity method investments". For the three months ended May 1, 2015 the figure was US$17 million. This accounting entry actually relates to the joint venture Masters Home Improvement business, which is one third owned by Lowe's and two thirds by Woolworths.
So What: The good news is that the losses from Masters were contained to the same level as the prior corresponding period. The bad news is the situation doesn't appear to be getting any less dire with some reportedly expecting the Masters business to clock up a total of $200 million in losses this financial year.
What now: As investors were reminded this week at the Wesfarmers Ltd (ASX: WES) Strategy Day, the Bunnings business remains phenomenally successful. Lowe's in the US operates a similarly compelling business and is a great strategic partner for Woolworths and the motivation for entering the hardware retailing sector is obvious.
The execution of that decision however remains underwhelming and Woolworths is digging itself a deep hole at the moment with its foray into hardware retailing. Only time will tell if the group can earn an acceptable return on its investment.
