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Tuesday 12 August, 2014: Woolworths Limited (Woolworths) today provided an update to the market on its Home Improvement business.

Key points
  • Update on financial results with losses in FY14 exceeding FY13, and expectation the business will not break even in 2016
  • We remain confident Home Improvement will become a material profit contributor for Woolworths  and the rationale for entering this market remains compelling
  • Solid start with 49 Masters stores opened, strong and growing national brand awareness and Home Improvement sales of more than $1.5 billion in FY14
  • Lowe’s has reaffirmed their commitment to the Joint Venture through amending the terms of their put option
  • Outline of plans to take the business from a promising start-up to a scalable, profitable business
Overview

Today Woolworths advises that it will not meet its guidance that Home Improvement losses for financial year 2014 would not exceed financial year 2013, and expects break even for the Home Improvement business will not be achieved during 2016.

We are disappointed we will not reach this guidance. However, we were right to set challenging targets for the business and will continue to set stringent internal hurdles for the Home Improvement business.

We remain confident that the Home Improvement business will be a material profit contributor for Woolworths and will deliver an acceptable return on investment.

Woolworths CEO, Grant O’Brien said: “Our Home Improvement business has made a good start. We have established a solid foundation and remain confident that it will become a material profit contributor for the Group. We have a strong track record in developing new growth businesses, for example our successful Liquor business.

“The rationale for entering this market remains strong. It is a $45 billion market, with 5% annual growth and one significant retailer with approximately 17% market share. It is a fragmented market that is in the process of consolidation as demonstrated by the 42% Masters sales growth in financial year 2014.

“We also continue to have a supportive Joint Venture partner in Lowe’s who has reaffirmed their ongoing commitment to the Joint Venture through amending the terms of their put option.

“Our Home Improvement business is entering its next phase of growth, from start-up to a scalable, profitable business. We recruited Matt Tyson, an outstanding home improvement retailer, for his direct experience in building young big box format businesses to maturity to lead this next phase.

“Following Matt’s appointment, we asked him to look objectively at the market, and how we build on our current foundations to take advantage of the opportunities available. We will continue to refine the model as we grow this business to profitability,” Mr O’Brien said.

Managing Director, Home Improvement, Matt Tyson, said: “The business has made a strong start in a short period of time. With 49 Masters stores and a growing Home Timber and Hardware store network, Home Improvement generated more than $1.5 billion in sales in financial year 2014.

“The next stage of our development will include a refocused store roll out plan, and an enhanced store format and range. We will continue to learn and adapt and will take the steps necessary to ensure we create a compelling customer offer and sustainable, profitable business,” Mr Tyson said.

 

Masters sales were $752 million, an increase of 42.2% on the previous year. Sales were lower than expected and were impacted by a highly competitive market and the Federal Budget’s impact on consumer confidence. Losses before interest and tax were higher than anticipated.

Masters remains in its development phase, with stores having traded, on average, for 17 months at the end of financial year 2014. The current store network includes a number of stores in regional and future growth areas which will take longer to mature.

Home Timber and Hardware EBIT was impacted by higher costs following financial year 2013 property disposals and a highly competitive market. We have a new management team and a clear plan for development of the Home Timber and Hardware business.

Refocused store roll out plan

To develop our footprint as rapidly as possible, we took opportunities to open new stores as they arose, moving at pace in Victoria and Queensland where planning approvals were achieved quickly. This has resulted in uneven national store coverage and a less efficient supply chain at this stage of development.

Going forward, we will focus on key metropolitan areas and selectively fill the gaps in our store network. In the coming months we will open two Adelaide stores, an area where we currently do not have any presence. We are also focused on bringing more stores to metropolitan areas in New South Wales and Queensland.

As a result of this refocused approach, we expect to open fewer new stores over the next two years and will not deliver the previously communicated target of 90 stores by the end of financial year 2016.

We plan to open around 10-15 Masters stores per year for the next few years to add to our existing base of 49 stores.

We will continue to selectively grow the Home Timber and Hardware store network. This includes our recent agreement to acquire Hudson Building Supplies. The acquisition will include 15 sites (10 in New South Wales and five in Queensland).

Enhanced ranges and format refinement

While Masters has strong national brand awareness, we are working on increasing customer traffic and conversion rates.

To address this, we are changing specific areas of our in-store offer to take better account of the opportunities that will increase the revenue of each store.

We will give more space to categories that drive customer visits, such as Hardware, and aim to further differentiate ourselves in project categories like Kitchens and Bathrooms where performance to date is ahead of expectations.

Naturally, these changes will take some time to roll out fully into all of our existing stores and as a result, we do not expect to see the full benefit in the short term.

Change to the terms of Lowe’s put option 

We also continue to have a supportive Joint Venture partner in Lowe’s. Their ongoing commitment to this business has recently been further demonstrated through a modification to the terms of their put option.

The opening date for the put option exercise period is deferred indefinitely. From October 2015, Lowe’s can issue a notice setting an exercise date for the option triggering a 13 month notice period after which the option can be exercised.

Conclusion

We remain confident about the Home Improvement business and that it will be a material profit contributor to the Group and will deliver an acceptable return on investment.

This was never a short-term business plan and we will take the steps necessary to ensure we create a compelling customer offer and sustainable, profitable business.

As Masters transitions into a new phase of growth, we will update the market on our progress at Full Year and Half Year Results.

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