Bunnings UK Woes Deepen
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Wesfarmers has joined the long list of Australian companies to lose heavily in offshore moves, especially into the UK with the evaporation of over $1 billion dollars in value spent on its Homebase purchase in 2016 and attempt to turn it into a British version of Bunnings.
It has been news that the more farsighted retail analysts and investors had feared would emerge from the company’s UK plunge, now utterly worthless, as its Target department store chain is in Australia.
Wesfarmers joins the likes of Fosters, Bond Media, the AMP, the National Australia Bank, Insurance Australia Group, Slater & Gordon and QBE in losing billions on poorly planed, badly executed expansion moves into the UK market, only to come a cropper.
Wesfarmers paid $A705 million for the faltering UK hardware (DIY in the UK) chain, Homebase and promised to send $1 billion rebranding and fixing it up - yesterday it revealed more than a billion dollars in write downs and trading losses.
On top of that the company, under new CEO Rob Scott wrote a further $306 million off the value of Target, the still poorly performing Australian department store chain. That takes total write offs for target to more than $2.1 billion since 2014 when $677 million was written down. A further $1.208 billion was written off Target in 2015 -16, along with $850 million off the value of the Curragh coking coal mine in central Queensland (that was sold for $600 million last December).
All up Wesfarmers has written off more than $4.1 billion since 2015 on Target, coal, and the UK (plus trading losses in Target and at Curragh totalling over half a billion dollars).
Wesfarmers said yesterday ((http://www.wesfarmers.com.au/docs/default-source/asx-announcements/significant-items-expected-in-2018-half-year-results.pdf?sfvrsn=2) it would record a non-cash impairment of $795 million against goodwill recognised on the Homebase purchase and the book value of the Homebase brand in its upcoming half-year results.
It would also write down $66 million of stock that was oversupplied or unsuitable, record store closure provisions of $70 million, and write down its deferred tax assets by $92 million (meaning because of continuing losses, those tax deferred assets will not be used and therefore have no value).
Wesfarmers said it expected Bunnings in the UK and Ireland (BUKI) to report an underlying loss before interest and tax of $165 million for the first half of the 2018 financial year - almost double the $89 million loss it racked up for the full 2017 financial year.
Wesfarmers has also assessed the carrying value of its investment in Target, resulting in a non-cash impairment of $306 million before tax, to be applied against the carrying value of its brand name ($238 million), remaining goodwill of $47 million and property and equipment ($21 million). Mr Scott said in yesterday’s statement that “the Group is focused on delivering satisfactory returns to shareholders by improving its underperforming businesses, proactively managing its portfolio and investing in value-accretive growth opportunities.
“We need to address underperformance in our portfolio that is detracting from positive performance in other areas, and the announcement today sets out decisive actions to achieve this,” Mr Scott said.
“The Homebase acquisition has been below our expectations which is obviously disappointing. In light of this, a review of BUKI has commenced to identify the actions required to improve shareholder returns.”
“The impairment of Target reflects difficult trading conditions in an increasingly competitive market. Target’s earnings have stabilised and the business will continue to leverage the Department Stores structure to support its future performance,” Mr Scott said.
On Homebase (Bunnings UK) Mr Scott said “It is clear that a significant amount of change has been driven through Homebase since the acquisition and the disruption caused by the rapid repositioning of the business has contributed to greater than expected losses across the Homebase network,” Mr Schneider said.
“Sales have been affected as non-core categories and concessions were exited ahead of the implementation of the Bunnings format, and investments in price and new ranges have not offset these lost sales. Trading was particularly weak during the latter part of the first half of the 2018 financial year.
“Our focus is on improving the profitability of Homebase through improved ranging and execution in stores, while continuing to develop plans for a broader conversion to Bunnings. The team has been strengthened, including through the addition of strong local expertise, to support improved outcomes,” Mr Scott said.
It is the first major decision from Mr Scott (apart from finalising the sale of Curragh last December) who took over from long time CEO, Richard Goyder (2005 to 2017) at the end of last year. Yesterday’s announcement has all the hallmarks of the now usual ‘kitchen sinking’ (find as many write downs as possible, announce them and blame them - without saying directly- on the old regime). It is what Pat Regan has done at QBE with its huge billion dollar plus write down.
Investors were kind to Wesfarmers - the shares ended down 4.5% yesterday at $42.16 on a day when most of the market was battered by the fallout from Wall Street’s big slide.
Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.
At the AFR he was a finance writer, Finance Editor, News Editor and Chief of Staff. At the Nine Network he was supervising producer of Business Sunday for more than 16 years. He has also written for other online and analogue print publications here and overseas.