Bunnings’ expansion across the UK is in doubt after parent company Wesfarmers was forced into $1.3 billion in first-half writedowns, due mostly to the poor performance of its British hardware venture.
Wesfarmers is reviewing rebranding plans for its chain of Homebase stores in Britain and Ireland and putting more money aside for potential closures after the 200-plus outlet operation failed to meet expectations.
The Perth-based conglomerate paid $705 million for Homebase in February, 2016, and Monday’s announcement sent its shares tumbling and sparked suggestions a swift and costly exit from the UK could be on the cards.
“The market is likely to begin pricing in an exit of BUKI (Bunnings UK & Ireland) under a new Wesfarmers senior management team, which is keeping all options on the table,” Citi retail analysts wrote in a note.
“The $1.8 billion of lease costs will be the key concern for investors in the event that an exit occurs.”
Wesfarmers managing director Rob Scott, who took the reins from Richard Goyder three months ago, said pulling the plug on BUKI was not the preferred outcome but he was open to all options.
“A lot of the issues we are dealing with today, to be frank, are self-induced,” Mr Scott told reporters on Monday.
“Two years ago this was a profitable business.”
He blamed a poor kitchen and bathroom range, a knock-on effect in flooring, tiling and plumbing sales, and a new pricing model for the disappointing performance.
The $1 billion writedown against BUKI also includes a non-cash impairment of $795 million, a $66 million writedown of excess and unsuitable stock and a $92 million tax asset writedown.
Only 19 Homebase stores have been rebadged, and Bunnings group managing director Michael Schneider said further changes were on hold after initial sales growth moderated over the northern winter.
Sales across the UK business had been weak in the six months to December 31, he said.
“We will continue to monitor the profitability of the first tranche of pilot stores over the remainder of the 2018 financial year,” Mr Schneider said.
“Achieving proof of concept for the Bunnings format is a precursor to executing a broader roll-out plan.”
That work, which may include smaller shops alongside the warehouse stores, will occur under new BUKI boss Damian McGloughlin, who was announced as the replacement for 25-year Bunnings veteran Peter Davis, who is retiring.
“We now have a team that understands the UK market and we have a number of opportunities to improve performance.” Mr Scott said.
Wesfarmers, which reports its first-half results on February 21, said BUKI is expected to show an underlying earnings loss of $165 million – well below Citi’s previous forecast of a $37 million loss.
Wesfarmers, which has also seen its Coles supermarkets fall behind rival Woolworths in terms of like-for-like sales growth, will also make $306 million in non-cash impairments against its struggling Target department stores in Australia.
The Target impairment reflects a more conservative outlook for the brand, Mr Scott said.
Wesfarmers shares closed 4.5 per cent lower at $42.16 on Monday – a three-month low.