Masters Home Improvement stores maybe closing down after Woolworths pulled out of the company. Photo at the Nerang store of the empty isles. Pic by Richard Gosling
WOOLWORTHS has finally pulled the plug on its disastrous Masters business, vowing to focus its efforts on reviving its underperforming grocery business. So is it time for Coles to worry?
Masters has been a thorn in the side of Woolworths since 2011, racking up losses of more than $700 million and dragging down the overall profitability of the group.
Analysts and investors yesterday hailed the decision by the board to finally face up to reality. Merrill Lynch’s David Errington congratulated Woolworths’ chairman Gordon Cairns as a “man of action”, describing it as a “momentous day” for shareholders.
Deutsche Bank is increasing its net profit estimates for the Woolworths group by 8 to 9 per cent from the 2017 financial year onwards.
It says while the sale of the business as a going concern is unlikely — even Mr Cairns yesterday said he had “no idea” whether Masters could ever be sustainable under alternative ownership — liquidation would generate a moderate cash inflow.
Analysts Michael Simotas and Daniel Wan estimate a one-off cash boost of $241 million, largely from liquidation of fixed assets and inventory.
Their analysis is based on “very conservative assumptions to reflect the expeditious exit process”, or a 50 per cent recovery value on properties and 70 per cent retail markdowns.
Woolworths will also benefit from the removal of a $275 million cash drag on the business and gain around $200 million in annual before-tax earnings.
Mr Cairns yesterday said the decision would allow the company to focus on reinvigorating its core food and grocery business, which is battling competition from rivals Coles and Aldi.
“While resolution of this issue is positive, underperformance of the [food and liquor] business is a bigger problem,” said Deutsche Bank’s Michael Simotas.
“Industry feedback suggests WOW had a tough Xmas notwithstanding substantial price investment and an undemanding base comp.”
Macquarie Wealth Management today said while the move was “the right call”, bringing the Woolworths supermarkets back to life wouldn’t be an easy fix, The Australian reports.
“We believe the Woolworths board has made the right decision in exiting Masters post the Lowes put option being exercised, rather than downsizing the network, enabling investment in supermarkets without raising equity,” Macquarie said in client note.
“The key outcome for Woolworths is the elimination of around $250m of EBIT losses and the opportunity it creates to invest in supermarkets.”
Woolworths has invested around $600 million into reducing grocery prices and improving its stores in a bid to become price competitive with Coles, which is now spending around $400 million a year.
Coles could soon be facing a reinvigorated competitor.Source:News Corp Australia
“In our view, execution of the funds invested into supermarkets will determine the value of exiting Masters. Simply having capital available to invest does not guarantee a successful turnaround but it does give Woolworths a greater chance,” Macquarie said.
“[The] announcement of a new CEO and the strategy implemented by the senior management team will be the most important driver of the turnaround.”
Ratings agency Moody’s is noncommittal, saying the “lack of clarity on the timing [and] cash amounts involved in the transaction” mean it’s too early to make any changes to Woolworths’ outlook.
“Moreover, we view the performance of the Australian food and liquor segment to remain the single-most important driver of Woolworths’ rating,” said Ian Chitterer, Moody’s vice president and senior analyst.
“Woolworths’ prospective sale or exit from its home improvement business would be credit positive in the longer term, as it would decrease its exposure to the loss-making Masters stores and reduce the need for future capital commitments to that business, thereby allowing capital to be diverted elsewhere in the group.
“An exit from the home improvement business would also reduce the number of operating challenges facing Woolworths and would allow the group’s management to focus on strengthening the performance of its core Australian food and liquor division.”
There is also the question of a significant tax bonus.
Once Woolworths completes the buyback of Lowes’ one-third stake, the value of which will now be assessed through a process laid out in the 2009 joint-venture agreement, it will be able to claim hundreds of millions in tax deductions.
“The number is about $200 million as of FY15,” Woolworths chief financial officer David Marr told analysts yesterday.
“That will go up a bit in the first half when we announce those results, and we’ll get a deduction as a result of losses incurred as a result of winding it up.”
As of June 2015, Lowes and Woolworths had sunk around $3.1 billion in capital into the home improvement joint venture, known as Hydrox Holdings Pty Ltd. Of that, around $2.1 billion was contributed by Woolworths and $1 billion by Lowes.
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