News reports in the Fairfax and News Corp press today suggest retail giant Woolworths Limited (ASX: WOW) may sell its Masters business if its joint venture partner Lowe's gives notice it will throw in the towel on the loss-making home improvement venture.
In the latest financial year Masters' losses ballooned out to $245.6 million on sales of $930 million, with the loss accelerating faster than the revenue growth in the prior year.
Woolworths' position is that it will make a decision on Masters' future based on the facts, although if Lowe's exercises its option to compel Woolworths to buy its one-third stake then the heat will increase on management at Woolworths to announce a strategy for the future.
Lowe's options
Lowe's is the world's second-largest home improvement business with annual sales of US$56 billion and cash flows from operating activities of US$4.9 billion, which means it's unlikely to pay much attention to the opinions of local analysts on how to run a home improvement business.
Lowe's is also unlikely to be in a hurry to write off Masters and will want to give it as long as possible to assess exactly what its chances are of ever seeing a return on its investment. It has reportedly just injected significant amounts of capital into the business and I expect it will be prepared to give its venture more time yet.
Woolworths' problems
Woolworths' new chairman Gordon Cairns has reportedly embraced Buddhism, although his mental state may be tested by other news reports that Bunnings Warehouse may try to acquire Masters' prime retail sites if they were put up for sale.
Home improvement sales at rival Bunnings continue to grow strongly and Woolworths' decision to take on the entrenched and dominant operator in the sector was a brave one that was always going to require huge amounts of capital expenditure.
Elsewhere, same-store sales at Woolworths' supermarket rival, Coles, also continue to post solid growth, with Woolworths' same-store sales declining in the most recent quarter, which is a result that should set alarm bells ringing for investors.
Given the declining same-store sales growth and Woolworths' multiple problems, investors would be better off considering Wesfarmers Ltd (ASX: WES) as an investment option. It operates both Bunnings and Coles and is due to release first quarter sales results on October 22.
The ASX's other junior food and grocery wholesaler Metcash Limited (ASX: MTS) has seen its shares collapse in half this year as a victim of competitive pressures from its local rivals and discount foreign entrants such as Aldi.
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