Woolworths is bracing for its home improvement division to lose $139 million as the building sector struggles and wage costs blow out.
The retail giant was hoping that Masters Home Improvement would challenge the dominance of Bunnings when its first stores opened in 2011.
But two years on, Woolworths’ hardware division is bleeding, with executives admitting they were too optimistic with their sales forecasts.
The flagship Masters group suffered a $157 million loss in fiscal 2013, in earnings before interest and taxes (EBIT), which was deeper than a forecast $119 million loss.
It comes as Woolworths’ overall home improvement division suffers a $139 million EBIT loss during the same period, which is steeper than an estimated $81 million loss.
Masters director Melinda Smith said the Woolworths joint venture with US hardware retailer Lowes had been too optimistic with sales forecasts, amid high wage costs for new stores and a lack of customers.
“We just put quite aggressive-stretch targets in for every store in FY13 across the board and, in hindsight, that just wasn’t a reasonable thing to expect,” she told analysts on Thursday.
“We didn’t know a lot about this business when we set the budget for FY13.”
Masters is expected to make another loss in 2014, before breaking even in fiscal 2016, as sales grow moderately at individual stores.
IG market strategist Evan Lucas said Masters was struggling to compete against established hardware store chain Bunnings, as consumers cut back on discretionary spending.
“The Masters brand has not been as strong as they were hoping,” he said.
“The amount of money they have injected, for the return to be pushed out to FY16, is a concern and would probably suggest they are losing out on market share as well.”
Meanwhile, hardware and garden distributor Danks posted an $18 million EBIT for fiscal 2013, compared with a forecast of $38 million.
“As head of the business, I’m clearly disappointed,” Mark Burrowes, the general manager of Woolworths’s Home Timber and Hardware Group, said.
“The market conditions out there are very challenging.”
Woolworths blamed Danks’ disappointing earnings on “higher levels of competition in a subdued trade and building sector”.
The retail giant is forecasting that Woolworths’ overall full-year net profits will rise by between five and six per cent in fiscal 2013, compared to earlier estimates of four to six per cent.
But this is before significant items totalling $105 million are factored in, which includes the costs of a US bond redemption, the outsourcing of its transport fleet in Victoria to Linfox and the establishment of the SCA Property Group.
In another development, Woolworths won’t require Australian private equity firm Anchorage Capital Partners to pay benefits arising from the future sale of the Dick Smith electronic stores.
Woolworths will receive now $74 million, bringing proceeds from the sale to $94 million.
Shares had fallen by 43 cents, or 1.28 per cent, to $33.26 at 1439 AEST, on a day when the overall market was in firmer territory.
