-- Home improvement unit records larger-than-expected loss
-- Woolworths says was too optimistic on sales
-- Shares decline in Sydney
(Adds further details, background on loss in home improvement
division.)
By Robb M. Stewart
MELBOURNE--Woolworths Ltd.'s (WOW.AU) foray into Australia's 42
billion Australian dollar ($38.5 billion) home improvement market
is racking up bigger losses than expected, a market update from the
retailer Thursday showed.
The company, which also operates the nation's biggest
supermarket chain by store numbers, said the division would post an
operating loss of A$139 million in the year through June--much
steeper than an earlier forecast for a loss of A$81 million. The
figure excludes tax and interest deductions.
Woolworths said it had been too optimistic with its sales
projections for the business, adding that higher wages and lower
sales margins had contributed to the wider-than-expected loss.
Still, the retailer said its annual earnings overall would rise as
expected by as much as 6% before one-time items, as it narrowed the
forecast range to 5%-6% growth from an earlier 4%-6% estimate.
"The rationale for entering the Australian home improvement
market remains compelling and attractive," the company said in a
statement, adding that steps had been taken to address the unit's
problems. Its shares ended the day 1.1% lower at A$33.32 after the
update, compared with a modest gain for Australia's benchmark
S&P/ASX 200 Index.
Woolworths operates supermarkets, liquor stores and
household-goods retailers in Australia and New Zealand, in addition
to some restaurants and bars. It moved into home improvement in
2009 through a joint venture with U.S.-based Lowe's Cos. (LOW) to
launch a chain of stores branded Masters, at the same time as it
acquired one of Australia's largest hardware suppliers, Danks
Holdings Ltd., for A$87.6 million.
While Australia's home improvement industry has struggled with
weak consumer sentiment in recent years, the fragmented sector's
appeal for Woolworths lay in the lack of significant competition.
Still, the retailer said Masters, whose first store was opened in
September 2011, alone recorded a loss of A$157 million in the
latest fiscal period--adding it didn't see any improvement in the
financial year just started.
Woolworths, however, reiterated its expectation that Masters
would break even in fiscal 2016 and said it would look to improve
inventory management as more stores were opened. There were 31
Masters stores at the end of June, about double the number a year
earlier, but the retailer said it had slowed the pace of new
openings.
Investor concern had been building up for a while over the
performance of the home improvement division. In a note to clients
back in May, investment bank J.P. Morgan lowered its recommendation
on the stock to underweight from neutral, foreseeing the latest
wider operating loss and expecting more shortfalls to occur through
fiscal 2017.
Woolworths reported its first annual earnings decline since 1999
in the year to June 30, 2012 with net profit falling 15% to A$1.82
billion, mainly on costs linked to its exit from the Dick Smith
electronics business and the start-up of Masters.
Write to Robb M. Stewart at robb.stewart@wsj.com
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