Should Woolworths Get Rid of Masters?

Woolworths Limited [ASX:WOW] is facing fresh scrutiny over the loss-making Masters home improvement chain. As if the coverage they got for funnelling millions into a loss maker wasn’t bad enough. Now, a top fund manager has made public remarks criticising management.

Hamish Douglass is the CEO and CIO of Magellan Financial Group. Yesterday, he spoke at a business lunch in Melbourne. Of Masters, he said ‘If the numbers don’t stack up they should look at divesting and realising the property in thebusiness so I think they just need a very hard nosed approach.’

He’s right about the numbers as they’ve been so far. According to the WOW FY15 results, Masters made a loss of $245.6 million. The year before, it lost $176 million. But for some reason, management is still optimistic. They say that Masters ‘remains in its development phase.’ Around 20% of stores have been refitted, and given new ranges. But there are nearly 60 stores in the network. That’s a lot of expensive work ahead. And for some reason, they’re still planning to open five to eight Masters stores per year for the next few years.

They will deal withMasters. Hopefully over the next 18 months, they will get [it] off their plate,’ said Douglass. Technically, it’s possible they could be forced on this. Masters is a joint venture with US hardware retailer Lowes. And Lowes has a put option (choice to sell assets) coming up in a few weeks. They are unlikely to exercise it, as they really like Masters and are pleased with its progress, for some strange reason. But if things continue to go south, well, the option is valid any time after October.

Woolworths shares are down slightly on Douglass’s comments. WOW opened at $24.71. As at 11:32am, it was trading down 0.04% at $24.75.

WOW Woolworths shares 11 09 2015
Source: Google Finance
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Douglass did have some positive comments to add. He sees good things for grocery retailing in general. ‘It’s a better industry than our banking industryWe have almost the most attractive industry structure in the world in grocery retailing and in our view over the next 10 years it’s going to become even more attractive,’ he said.

If you’re looking for a retailer to add to your portfolio, don’t miss Money Morning publisher Kris Sayce’s free report. It’s titled ‘Three Best Investments in Australia for 2015 and Beyond’. In this report, Kris explains how, why, when and where the retail sector will come back. And he reveals the names (and ticker codes) of the retailers he thinks are worthy of your attention.

It seems unlikely that WOW will get rid of Masters. At least, not for several years. No matter how bad the books look, they’ve kind of dug themselves a hole now. But Woolies will still survive. And there are plenty of other retail opportunities out there. Remember to find out how to download your free copy of ‘Three Best Investments’ to learn more.

Eva Mellors
Contributor, Money Morning

Money Morning Australia