The decision of Australian retailer Woolworths to pull out of its home improvement store, Masters, has drawn a positive response from analysts and investors. The exit strategy involves buying out the stake of the joint venture partner Lowe’s International.
Foraying into the AU$45 billion home-improvement market in 2009, Woolworths had an agenda of scouting higher growth beyond its food, liquor and general merchandise portfolio. Then the indirect goal was pressuring rival Wesfarmers in its most profitable business Bunnings.
The duo jointly invested more than AU$3 billion in home improvement and was expecting to break even in 2016, reports The Australian Financial Review.
“The board has determined we cannot continue to sustain these losses,” said chairman Gordon Cairns. He also added that “we didn’t have the risk appetite to continue losses into the foreseeable future.”
Analysts commented cryptically.
“They had to fix it or get out of it . . . clearly it couldn’t keep going as it was,” Argo Investments managing director Jason Beddow said.
“We welcome today’s announcement from Woolworths and are happy with Gordon Cairns’ stewardship to date,” Perpetual Investments’ chief of equities Paul Skamvougeras said.
Post exit, Woolworths advantage will be that it can walk off with AU$1 billion in cash that it can invest in the struggling food and discount store chains.
One more reason why analysts and investors are applauding is it will be just one-off costs and some write-downs for Woolworths. The write off will be in the range of AU$600 million to $1.2 billion. But Woolworths gain will be substantial as it can raise as much as AU$2 billion with a sell off from Masters stores, stock and 63 sites where 39 are fully owned by it.
That will also end its woes of operating losses with Masters that was nearly AU$245 million to AU$300 million a year. Another relief is there is no need to waste capital. Woolworths’ core businesses are already calling for attention after coming under pressure from Coles, Kmart and discounter Aldi.
Credit ratings agencies Moody’s and Standard & Poor’s also hailed Woolworths’ decision to exit. They believe the move would trigger an exodus of high cost ventures and reduce the drain on capital. It will also allow senior management to focus more on the core supermarket business.
North Carolina based Lowe’s runs 1,8445 stores in the US, Canada and Mexico. According to Richard D. Maltsbarger, president, the company will focus more on areas where can get a fair return on investment, reports STL today.