Bunnings UK fail leads Wesfarmers to $1.3-billion hit to bottom line

The underperforming Bunnings UK has cost Westfarmers dearly in profit and personnel.

The underperforming Bunnings UK has cost Westfarmers dearly in profit and personnel.

Wesfarmers is overhauling the leadership at its underperforming Bunnings UK business after the struggling hardware unit was responsible for the majority of $1.3 billion in first-half write-downs and impairments.

The Perth-based conglomerate on Monday said 25-year Bunnings veteran Peter Davis will retire and be replaced as head of Bunnings UK by Damian McGloughlin.

Wesfarmers said the former Homebase business had not met expectations since being acquired for $705 million in February 2016, and that it will be subject to about $1 billion in impairments and write-downs.

The remaining $306 million non-cash impairment is related to Wesfarmers’ struggling Target department stores, which group managing director Rob Scott said were still contending with difficult trading conditions.

“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 in a statement to the ASX.

“The Homebase acquisition has been below our expectations, which is, obviously, disappointing.”

Wesfarmers will record a non-cash impairment against its UK business of $795 million, a $66 million write-down in the value of excess and unsuitable stock, a $70 million increase in store closure provisions, and a $92 million tax asset write-down.

The UK unit is expected to show an underlying loss before interest and tax (EBIT) of $165 million, when Wesfarmers reports its first-half results, scheduled for February 21.

Eighteen Homebase stores have been rebranded as Bunnings in the UK with encouraging results, but Bunnings managing director Michael Schneider – who oversees the entire hardware unit – said overall sales were particularly weak in the first half.

“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.”

The Target impairment reflects a more conservative outlook for the brand, Mr Scott said, despite overall department store earnings, including Kmart, hitting their highest level since 2010.

Target is expected to report first-half earnings before interest and tax (EBIT) of $33 million, up 13.8 per cent on the prior corresponding period.


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