What: Reports in the Fairfax press today suggest Australia's leading retailer Woolworths Limited (ASX: WOW) has all options on the table for dealing with the underperforming Masters Home Improvement business including shutting it down.
According to a report in the Australian Financial Review (AFR), later this month Woolworths' Home Improvement joint venture partner the US-based Lowe's Inc has the right to exercise a put option on its 33% stake.
So What: For the full year ended June 30, Woolworths reported an increase in losses within the Home Improvement division which houses both the Masters business as well as the Home Timber and Hardware business.
While sales grew 22% to $1.9 billion, losses before interest and tax sank 33% to $225 million. Splitting those numbers out, Masters recorded a 24% increase in sales to $930 million and a 39.5% increase in earnings before interest and tax (EBIT) losses to $246 million.
While Home Timber and Hardware recorded a 21% rise in sales to $937 million and a near 200% jump in positive EBIT to $21 million.
What now: With a newly installed Chairman at Woolworths there is speculation that the situation will be brought to a head with decisive action taken to stem the mounting losses.
Those options could include buying out Lowe's 33% share, but they could also include trying to divest the business unit to private equity or undertaking an orderly shutdown with the AFR report suggesting other big box retailers would be keen to snap-up a number of the properties which currently house Masters' stores.
What eventuates remains to be seen, however, the temptation to snare a share of the home improvement market may ultimately be too hard to resist and lead Woolworths to battle on.
Indeed the reason for the venture in the first place was to build a business which could rival Wesfarmers Ltd's (ASX: WES) Bunnings. In the past financial year, Bunnings reported sales growth of nearly 12% to $9.5 billion and EBIT growth of 11% to $1.1 billion. That's a $1.1 billion temptation that is very hard to ignore!
