With its share price down 30% in just one year, it was only a matter of time before Woolworths Limited (ASX: WOW) investors swayed their accusing finger from the boardroom toward the struggling Maters Home Improvement business.
Source: Woolworths Annual Reports 2012-2015
And following the announcement of the resignation of CEO Grant O'Brien and change of chairman, the crosshairs are fixated on Masters' accumulating losses. Between 2012 and 2015, total losses from the Masters business stood at $695 million on sales of $2.35 billion.
Citigroup analyst, Craig Woolford, estimated the cost of removing Masters was $1.6 billion, according to The Australian Financial Review. The figure includes the cost of breaking leases, clearing inventory and the paying out the put option to Woolworths' US-based joint venture partner, Lowe's.
However, hardware expert, Geoff Dart, was today quoted in a Fairfax article which stated Masters' losses could blow out to between $600 million to $900 million over the next four years, unless something changed.
He suggested Masters move into the largely fragmented 'finishing' market, which includes everything from tiles to window coverings and home automation; which is estimated to be worth $38 billion a year.
The extremely successful Bunnings Warehouse, owned by Wesfarmers Ltd (ASX: WES), controls 20% of the Home Improvement market (where Masters is currently seeking to grow), but just 2% to 3% of the finishing market.
Mr Dart said by cutting store sizes and making a few product changes, Masters could grow profit margins and: "They could reach $1.5 billion to $2 billion in revenues and have a very profitable business."
Will they, or won't they, dump Masters?
I'm of the opinion that Masters made a number of mistakes when it choose to do exactly the same thing as Bunnings. And parking a brand new Big Box store right next door to its market-leading competitor was always going to be a terrible idea!
However, I'm confident that there is room for two major players in the Home Improvement market, and it would be a myopic mistake for management to dump the business completely. I think an alternative for a management team, who want to minimise their exposure (risk) to the business but lock in some upside in its long-term future, could be to partially IPO the business on the ASX.
Finally, it's important to remember that in business – and in politics and life – you've got to be prepared to spend money to make money. For example, Wesfarmers first bought Bunnings shares in 1987 before taking control of it in 1994 – good things take time.
