The Wesfarmers Ltd (ASX: WES) share price opened down 4% to $42.55 this morning after the company announced that it would report massive losses on its Bunnings UK and Ireland investment in the upcoming half-year results.
Due to the poor performance of Bunnings UK, Wesfarmers will take a A$795 million write-down on goodwill recognised on the acquisition of Homebase. It will also write down A$66 million worth of excess or unsuitable stock and take A$70 million in provisions on store closures.
Bunnings UK is also expected to report an underlying loss before interest and tax of A$165 million, reflecting poor trading performance. At least part of the losses were attributed to non-core categories and concessions being exited ahead of the transition to the Bunnings brand.
This makes it sound as though Homebase has changed its customer proposition somewhat – i.e., customers that go to Homebase looking for certain 'Homebase' things may now no longer have these particular needs met.
Management noted that an investment in price and new ranges was not sufficient to offset these lost sales. It is difficult to know if this is just a period of adjustment to the new Bunnings offering, or if Homebase/Bunnings is really just failing to compete in the UK.
It is ironic that after their decimation of Woolworths Limited's (ASX:WOW) Masters Hardware, Bunnings itself is facing the same challenges overseas. Perhaps the hardware industry is not as easy to penetrate as previously thought.
Bunnings management has announced a nationwide review of the UK & Ireland Bunnings/Homebase business, with a view to accelerating the conversion of stores from Homebase to Bunnings, as well as stemming the underperformance.
Also in today's update, and unrelated to hardware, Wesfarmers will take a $306 million write-down on the value of its Target brand name, as that business also continues to struggle in a competitive environment. Fortunately however, Target's earnings are improving and on an underlying basis and are up around 14% compared to last year.
Wesfarmers is expected to release its half-year results on the 21 February, and we'll have full coverage for you then.
