Woolworths Limited (ASX:WOW) share price has lost close to 30% over the past 12 months, as investors fret over the multitude of issues the supermarket retailer faces.
One major issue commonly mentioned is the 'disastrous' rollout of Masters hardware as direct competition for Wesfarmers Ltd's (ASX: WES) Bunnings. Now Bunnings is arguably one of Australia's best retailers and has delivered consistent sales and earnings growth for many years.
At the time of Masters' inception back in 2009, the idea Woolworths management had was to attack another part of Wesfarmers' business, while Coles was struggling to grow earnings and margins competing against Woolworths' supermarkets.
The plan clearly backfired, with Coles recovering and outposting Woolworths every quarter since. Coles has also overtaken Woolworths in sales per square metre (sqm). Woolworths now finds itself in a similar boat to Coles, with sales per sqm declining, and will likely be forced to slash its supermarket margins to compete on a level footing.
Masters has struggled from a rushed roll out and perhaps a format unsuited for hardware consumers amongst other issues. While Woolworths plans to slow down the opening of new stores, it is also changing store formats, which has reportedly been successful.
But Masters is but only half of Woolworths hardware division. Many investors seem to forget that Woolworths also owns the Home Timber and Hardware brand. It currently generates higher revenues than Masters and is profitable at an earnings before interest and tax (EBIT) level, albeit at a low (but increasing) margin.
In the 2015 financial year, while Masters posted a loss of $245.6 million for EBIT on revenues of $930 million, Home Timber and Hardware posted EBIT of $20.9 million (up 200% over 2014) on revenues of $937 million.
Clearly the strategy with Home Timber and Hardware's 44 stores compared to Masters' 58 is working. But it also suggests that Woolworths might not be far away from getting Masters' strategy right – despite the huge losses.
| Revenues FY2015 | EBIT | Stores | |
| Masters | $930m | ($245.6m) | 58 |
| Home Timber & Hardware | $937m | $20.9m | 44 |
Source: Company reports
One potential solution to the Masters issue could be to rebrand Masters as Home Timber & Hardware. The Masters brand appears to have negative connotations amongst consumers anyway.
As a long-term shareholder in Woolworths, I have no doubt the company can turn around Masters performance, whatever path they take with the business, and without having to sell it or dump it totally – which appears to be every analysts' solution.
