Woolworths Limited (ASX: WOW) still seems to be having an off year, especially with mounting losses in the DIY home improvement space. Its Masters store chain is producing more red ink, according to The Australian Financial Review.
Masters is a joint venture with the US home improvement business Lowe's Companies, Inc. (NYSE: LOW), so when that company reported its third quarter earnings results this week, its financial statements suggested growing losses coming from Masters.
Masters was already racking up losses and Woolworths isn't expecting it to turn a profit until around 2016 (some analysts think more like 2018).
Home improvement is a big business
Before the Masters chain began, Wesfarmers Ltd's (ASX: WES) Bunnings Warehouse was the biggest name in the DIY hardware market and it is still the clear winner. Bunnings is one of the best performing businesses Wesfarmers has. Woolworths hoped to take part of that very lucrative market with Masters, but after operating for a number of years, profits are still elusive.
Losses keep piling up
Back in August, Woolworths' home improvement business reported an EBIT loss of $169 million for FY 2014, up from a $138 million loss in FY 2013. Lowe's quarterly financial figures indicate around a $57 million loss for the three months ending in October. This comes at a time when Woolworths' supermarket sales are under pricing pressure and experiencing stronger competition from its rival Coles, as well as Aldi and recent market entrant Costco Wholesale Corporation (NASDAQ: COST).
Share price and yield
Since the end of October, shares have dropped off steeply from $36 to a new 52-week low of $31.16. Currently around $31.60, the stock is paying a 4.5% fully franked yield.
Masters' place in Woolworths
One thing investors should consider is that Masters still makes up a small percentage of total sales revenue for Woolworths. In its first quarter FY 2015 sales release, of the total $16.5 billion, Masters only accounted for $238 million, or about 1.5%.
Losing money is never good, but these can be seen as teething pains for a developing business. However, to reduce losses Woolworths is slowing the pace of new Masters store rollouts until it can achieve a stronger business model.
For shareholders, keeping this in perspective is key to making business-like investment decisions. Look for indications that the home improvement losses are slowing and Masters starts to gain traction.
