Wesfarmers weighing up future of Bunnings foray into UK

Wesfarmers weighing up future of Bunnings foray into UK

Wesfarmers weighing up future of Bunnings foray into UK

Updated 5 February 2018, 18:15 AEDT

Wesfarmers isn't having a good day, given $1.3 billion was written off its Bunnings UK and Target chains.

Shares in Wesfarmers have slumped, as the retail giant considers the future of its UK hardware business.

Wesfarmers will take a $1.3 billion hit on poor performance from its Bunnings UK and Target chains.

The conglomerate, which also owns Coles supermarkets, has flagged write-downs and impairment charges ahead of its latest earnings report, due later this month.

"We need to address the underperformance in our portfolio that is detracting from positive performance in other areas," said Wesfarmers managing director Rob Scott, who took up the top job in November.

Most of the hit will come from a $795 million impairment charge against its Bunnings UK and Ireland business.

UK Hardware business 'below expectations'

Wesfarmers has commenced a review of the UK operation, which has failed to meet expectations since the $705 million acquisition of the Homebase chain in 2016.

In a briefing today, Mr Scott stressed that an exit is not the preferred path but said all options are on the table.

"Why we think it's not the preferred option, or indeed the most likely option, is that this business was profitable two years ago," Mr Scott told analysts.

"Whether or not it will be meaningful enough to be a significant part of the Wesfarmers group in the future, that's an open question."

For now, there is a change at the top, with the unit's managing director Peter 'PJ' Davis announcing his retirement.

He will be replaced by Damian McGloughlin, who previously worked at UK home improvement chain B&Q.

Rapid changes not well received: Wesfarmers

Wesfarmers' strategy for the Homebase acquisition was to roll out changes across the existing stores in preparation for converting them to the Bunnings model.

In the process, it exited a number of product lines in the kitchen, bathroom and decorative ranges, while expanding the hardware range.

"The pace and nature of this change was not well received by traditional Homebase customers," Mr Scott said.

"A lot of the underlying causes of the losses we've reported today have been through our own doing, so similarly we see an opportunity to undo some of those issues and improve performance."

Despite the disappointment of Homebase, Mr Scott said the performance of new Bunnings stores in the region was "encouraging".

Its first UK Bunnings-branded store opened just over 12 months ago in Hertfordshire as part of a pilot program, which now includes 19 stores.

Wesfarmers said Bunnings UK and Ireland would post a $165 million underlying loss for the first-half of the financial year.

Target hit by tough trading conditions

Meanwhile, Wesfarmers said department store Target is being affected by tough trading conditions in Australia.

A $306 pre-tax impairment charge will be recorded following lower-than-expected sales performance.

However, Wesfarmers said Target has improved its underlying earnings, which it expects to come in at $33 million for the half-year.

"Target has made good progress to improve its financial performance," Mr Scott said.

"The impairment follows the continuation of difficult trading conditions in an increasingly competitive market."

Wesfarmers is due to report its first-half profit result on February 21.

At 11:40am (AEDT), Wesfarmers shares fell 4.7 per cent to $42.09.

The company said the impairments are not expected to impact dividends paid to investors this financial year.

Shares in Wesfarmers finished the session 4.5 per cent lower at $42.16.