While Wesfarmers [ASX:WES] extends its scope of home hardware businesses into the UK, Woolworths [ASX:WOW] has decided to discontinue theirs. Today Woolworths announced its exiting of the Masters home hardware business. The company stated the Masters business will be likely sold off to a potential buyer or just discontinued.
The Masters business just wasn’t profitable. And it would take many years for it to be so. Woolworths move could’ve been taken one of two ways. Either investors would be disappointed with Woolworths failed attempts to rival Wesfarmers. Or they would be ecstatic that Woolworths removed a failing investment before things got any worse.
Today Investors decided to take the latter position. Woolworths’ shares shot up 7.48% on open, reaching a high of $24.28.
Source: Yahoo finance
The move to discontinue Masters has been a relief to shareholders, to say the least. Woolworths is still down 6% for the year. But now capital can be used where it’s needed more; Woolworth’s core business. Supermarkets.
Masters was no longer sustainable
Motivation for closing Masters’ doors was not only profits; lost confidence was also a factor. Joint venture partner Lowe’s, an American retail company, jumped ship on the Masters business. Lowe’s exercised its right to sell back their Masters holding to Woolworth. That shows their view of what could be called a wasted venture. Woolworths was left owning more of the Masters business than they intended. Woolworths chairman, Gordon Cairns, told investor that Lowe’s decision was a crucial factor for his decision to call the quits on Masters.
Cairn also pointed to a strategic review which also showed Woolworths the Masters business for what it really was. A profit sucking project. Masters wouldn’t have been profitable for years, as shown by the strategic review. And there’s no shortage of evidence of why the Masters business should’ve have been cut years ago.
Woolworths had sustaining ongoing losses because of the Masters business. In four years Masters had cost Woolworths $600 million, losses that were simply eating into profits. Cairns should have cut the project years ago.
Meanwhile, Wesfarmers had no trouble running their very successful home and hardware business Bunnings. My guess is Cairns got caught up with the competition and became distracted.
I’m just surprised it took Woolworths so long to realise Masters wouldn’t be viable.
Cairns has now got to minimise damages. There are 7000 Masters employees across Australia. Cairn won’t ‘guarantee jobs’ but Woolworths will try to roll them over into their stores.
Stick to what you know
Now that Woolworths is determined to sell off the Masters business, they will be able to put more effort into improving their supermarkets. Shareholder wealth always comes first, and to improve it Woolworths will need to stick to supermarkets.
For FY15 Woolworth’s supermarket businesses accounted for 78% of total revenues. Sure some say it’s good to diversify. It limits your risk exposure and can reduce losses. It could be a reason why retail giants like to branch out. But this investment tip is for those who are general investors. Those who want to dabble in the market to make some small short lived returns.
For specialised experts, like Woolworths, it is a better to stick to what you know. And with Cairns recent decision, Woolworths might be catching onto this.
Cairns also has the long awaited decision to replace outgoing CEO Grant O’Brien. Cairns knows he has a lot of decisions to make in the near future. But if Woolworths are able find a buyer for the Masters business, it might be smooth sailing from then on.
Once Masters is off the books Cairns will need to appoint a new CEO to make Woolworths great again. It will be up to father time If Cairns can turn Woolworths situation around.
Junior Analyst, Money Morning
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