Woolworths to sell or shut down Masters hardware chain

Woolworths will seek a buyer for its perennial loss-making hardware chain Masters or close the business completely.

Woolworths announce they will either sell off their hardware stores Masters Home Improvements or close stores down if no buyer is found. Customers L-R Ebony, Tina and Amber Toth at the new Marsden Park store pictured outside. Picture: Toby Zerna

Woolworths will seek a buyer for its perennial loss-making hardware chain Masters, or close down the business completely, after ­finally drawing a line under its six-year venture into home improvement that burnt through billions of dollars in shareholder funds and failed to lay a glove on powerhouse rival Bunnings.

Beyond its deepening losses, which are on track to blow out to $1 billion, Masters has been the centre of a major embarrassment for Woolworths — once seen as the best retailer in the nation — and proved a distraction for senior management and the board as they tried to arrest shrinking earnings at its flagship Australian supermarket arm.

The ambitious plan of former Woolworths chief executive Michael Luscombe, first unveiled in 2009, to roll out 150 Masters stores across the nation and grab a big slice of the fast-growing $24bn hardware sector was snuffed out yesterday by recently appointed Woolworths chairman Gordon Cairns, who conceded that investors could no longer stomach the widening losses of the ill-fated chain.

The decision, which puts 7000 jobs at risk, brings to an end what is arguably Woolworths’ worst investment decision in more than two decades as a listed company and is likely to trigger a massive non-cash writedown in the retailer’s full-year accounts for 2016 as it slashes the value of its stake in Masters, currently valued at $2.8bn.

“We decided as a board that we didn’t have the risk appetite to basically (carry) those losses going forward into the considerable ­future,” said Mr Cairns, who was brought in late last year to shake up Woolworths in the midst of an operational and earnings funk.

Adding salt to the wounds of Woolworths executives, especially its Masters team, was the fact that on the same day it finally raised the white flag in the Australian hardware wars its arch rival Bunnings unveiled its own momentous push into the British market with its owner, Wesfarmers, agreeing to buy British hardware group Homebase for $705 million.

Investors welcomed the end to Woolworths’ hardware nightmare, sending shares in the retailer up nearly 8 per cent on an otherwise bad day for equities, with Woolworths eventually closing up 99c, or 4.4 per cent, at $23.65. This marked the retailer’s single biggest gain in five months. Wes­farmers closed up 2 per cent at $40.12.

“Masters has been a distraction,” Credit Suisse analyst Grant Saligari said.

“It has taken up quite a bit of board and management time for a while and financially Masters has taken up quite a bit of cashflow. This will lessen the cash drain and for Woolworths management, I think, it allows them to focus.”

Hounded for years by investors demanding an end to Masters after years of losses and little real prospect for profit, Mr Cairns yesterday outlined plans for Woolworths to buy back the 33.3 per cent interest in Masters owned by its US partner Lowe’s. Such a move gives Woolworths a cleaner structure to sell the business or shut it down.

Recent sales figures released in November showed the average Masters store was losing $78,000 a week. Masters losses blew out from $176 million in 2014 to $245m in 2015, and since its inception Woolworths has poured as much as $2.5bn into the chain.

Any dreams of Masters taking the shine off Bunnings and diverting Wesfarmers as it restructured and resuscitated Coles were well and truly scotched, with Bunnings’ profit trajectory never missing a beat, despite the onslaught from Woolworths and its partner, US hardware giant Lowe’s.

“I don’t think this is about Masters against Bunnings in the home improvement market,” Mr Cairns said. “This was a decision that was taken with the view of what is in the best interest of Woolworths shareholders. This was clearly a difficult decision for us to make and we have been working on this decision now for a number of months. We decided we couldn’t sustain the losses from Masters into the foreseeable future and we didn’t have the risk appetite either.”

The soul-searching by Woolworths over the fate of Masters led its partner, Lowe’s, to exercise its put option over the weekend, to sell its one-third stake to Woolworths. Under the agreement first signed six years ago, both parties will now negotiate in good faith for the next five days over the price Woolworths will pay for that option. If the parties can not agree, they will then each seek independent advisers to help formulate a price, with a third independent valuation called in if they still can not agree.

Mr Cairns said this would enable Woolworths to have full ownership of Masters, from which point it could best put the business up for sale or shut it down completely if no buyer could be found.

Any current Masters stores currently under construction will be built but will not open, while the Home Timber & Hardware banner group created at the same time it established Masters in 2009 will also be sold off.

Platypus Asset Management fund manager Don Williams said yesterday’s developments would cause him to review the stock after refusing to buy into the company for a number of years.

“Whenever there is material change in any stock, and I guess especially one that has had historically a pretty good pedigree, you would be crazy not to review it and rethink your thesis on it,” Mr Williams said.

“But it’s just a first step, and there is still a lot of hard work to do at their supermarket to get the offering back to where it was or close to where it was.”

Darren Thompson, chief executive of Northward Capital, labelled the decision “pragmatic”.

“Clearly Masters hasn’t worked and from a fund-manager perspective it makes Woolworths a cleaner investment case than it was before,” Mr Thompson said.