Wesfarmers chief laments ‘self-induced’ errors after flagging UK writedowns

Wesfarmers chief says that a string of “self-induced” errors contributed to writedowns against Bunnings UK.

Bunnings Warehouse first UK store in St Albans holding their first Saturday Sausage Sizzle. (Picture: Mega/news.com.au)

Wesfarmers chief executive Rob Scott has refused to target when he believes his loss-making Bunnings UK business will emerge profitable and has admitted to a string of “self-induced” errors, including poor range in the kitchen and bathroom categories, an excessively paced stripping out of popular concession brands and shoppers not warming to a new pricing model.

“What we are mindful of is that a lot of the issues we are dealing with today have been, to be frank, self-induced,’’ Mr Scott conceded this morning.

Describing the $1.3 billion in writedowns flowing from Bunnings UK and a still problematic retail chain Target, Mr Scott described the impairments as “terrible” and “confronting” news but signalled he wouldn’t allow Bunnings UK to drag on for years and rack up billions in losses as Woolworths did with its failed Masters hardware experiment.

“I appreciate that what we have disclosed today is terrible news, terrible news for shareholders, and we feel the pain of that as shareholders as well, but what is most important as the new CEO and (our) new CFO is what do we do from today onwards to address this issue.

“We are not just going to let this roll out for years and years and years,” Mr Scott told The Australian, “we need to provide certainty and clarity over it.”

After only four months in the job and inheriting a growing operational mess in the UK from former CEO Richard Goyder who led the acquisition of Homebase in 2016, Mr Scott said a complete review of the Bunnings UK and Ireland arm would seek to patch up its faults to return it to profitability, noting a complete sale of the offshore business could not be ruled out.

“It is not our preferred option, but all options are open. And we will go through this review in a very detailed way, very strong focus on improving performance and reducing the cash losses.”

Mr Scott revealed Bunnings UK was sitting on lease liabilities of $1bn, making an exit a costly exercise for shareholders. The outcome of the review will be announced in June. Until then, there will be a freeze of conversions of Homebase stores to Bunnings.

“We are investors and we think like investors and the reason why we are announcing what we are announcing today is we feel it is important that we take decisive action to deal with an area of significant underperformance and we are very focused on reducing the losses and taking the actions necessary.

Detailing the operational issues at Bunnings UK, Mr Scott said the kitchen and bath categories remained “problematic” and that it took longer to come up with their own Bunnings model for the kitchen offer and get that in the stores. Upheaval in the kitchen category and a downturn in sales had spilt into adjacent categories like flooring, plumbing and tiling.

“My view is we don’t have our offer right yet, in those adjacent related categories, there is still clearly more work to do on kitchen and bathroom.’’

The UK market had struggled with the move to everyday low pricing (EDLP) model, which has proved a winner for Bunnings in Australia, although there were some signs of improving reception from shoppers.

“Clearly the move to EDLP in isolation in Homebase particularly given the fact we exited a whole lot of lines that were a really key purpose of customers coming into Homebase, that obviously hasn’t proven the uplift in sales that we would have liked.’’

There was also the impact of stripping out popular concessions from within Homebase stores such as homewares brand Laura Ashley.

“Whilst I think conceptually the decision to exit various retail concessions was probably the right decision over time, the pace of which we exited those concessions and the failure to present other range, other products that resonated with Homebase customers really contributed to some of these losses.’’

But Mr Scott remained confident Wesfarmers (WES) could arrest Bunnings UK’s worsening earnings and return it to profitability.

“Two years ago this was a business that was profitable, we now have a team that understands the UK market, we have number of opportunities to improve the performance and that is what we are very much focused on.’’

Wesfarmers said it would take a pre-tax non-cash impairment charge of $795m for the Bunnings UK and Ireland unit, mostly to be recorded against the goodwill recognised from the acquisition of UK hardware chain Homebase. Wesfarmers also said it would take another $228m of additional writedowns against the unit, including charges related to excess display stock and store-closure provisions.

The Homebase acquisition, announced in January 2016, has performed below expectations so far, managing director Rob Scott said. Wesfarmers said it is commencing a review of the UK and Ireland Bunnings business to improve shareholder returns.

The UK and Ireland Bunnings unit is expected to report an underlying loss before interest and tax of $165m in the fiscal first half, Wesfarmers said.

Meanwhile, Peter J. Davis, the managing director of the UK and Ireland Bunnings unit, will be retiring, the company said. Damian McGloughlin, with more than 30 years of experience in the UK home-improvement market, will take over leadership of the unit.

In Australia, Wesfarmers said its Target department-store chain would book a $306m non-cash impairment before tax, reflecting “difficult trading conditions in an increasingly competitive market,” Mr. Scott said. Target’s sales in the fiscal first half were lower than expected.

Still, Wesfarmers said Target is expected to report earnings before interest and tax of $33m, a 14 per cent increase from the prior period. The combined department-store business, including discount chain Kmart, will report earnings of approximately $415m for the fiscal first half, representing the highest level of combined first-half earnings since the 2010 financial year, the company said.

Wesfarmers will report full first-half earnings on February 21.

with Dow Jones