Woolworths (WOW) shares hit a 52 week low in trading yesterday as the great November sell off in the country’s biggest retailer continued.
Woolies shares hit a low of $32.07, 17% under the 52 week high hit in late May of $38.92.
The shares dropped 2.2% yesterday, taking the fall so far this month to more than 10%.
They entered correction territory (a fall of 10% or more than their previous peak) last week.
The sell off has gone on since the retailer revealed weak first quarter sales earlier this month, which for its core supermarkets and liquor businesses, were not as strong as those reported by rival Coles.
WOW YTD – Woolies shares enter correction territory
A few brokers then downgraded the shares, with some questioning the continuing losses of more than $150 million a year in the Master’s hardware chain.
And that’s where the latest issue to worry investors has emerged.
It’s a very expensive issue in the shape of dud electrical circuit cabling which could cost Woolies tens of million of dollars in remedial costs, and will come off this year’s earnings.
Woolies’s hardware business was one of a number of retailers which sold faulty electrical cable to about 40,000 households and businesses from 2010 to 2013.
The faulty cable was sold by about 18 retailers and wholesalers – including Woolworths’ Masters, Home Timber & Hardware and Thrifty-Link stores as well as Metcash’s Mitre 10 stores.
The Australian Competition and Consumer Commission announced a voluntary recall of the cable in August after tests showed the plastic coating could become brittle, especially if exposed to prolonged high temperatures. That brittleness could happen more quickly than expected, thereby raising the risk of short circuits, electric shock and fires.
A task force established by the ACCC first up estimated the cost of identifying and removing the faulty cable, rewiring and repairing walls and ceilings would be about $80 million, or an average of $2,000 per household.
But that estimate has now been doubled, which could boost the total clean up cost to as much as $160 million.
Complicating matters is the collapse of the company which imported the cable from China (it’s called Infinity Cable Co).
That forced retailers and wholesalers to meet the costs of inspections, removal and replacement where the cable is found.
Woolworths sold more than 40% of the cable and will have to meet much of the final bill, which could very well rise again given the actual costs of removing and replacing the cable hasn’t been worked out from actual activity.
Investment bank Merrill Lynch this week estimated the total cost of the clean-up could be as much as $600 million, or $15,000 per household, based on the cost of fully rewiring a home.
But Woolworths and the ACCC say Merrill’s estimates are too high.
But its obviously worrying investors and is another issue for Woolworths to deal with at a very difficult time.
