Wesfarmers admit Homebase disaster and prepares way for UK&I exit

Earlier today Wesfarmers announced to the Australian Stock Exchange that they would be taking a £454m impairment charge on their purchase of Homebase and that they expect to confirm half year losses before interest and tax of around £97m when it announces its six month results on 21st February.

The 'significant items' in the Groups first half results include:-

• Non-cash impairment of £454 million before tax, with £444 million to be recorded against goodwill recognised on the acquisition of Homebase and £10 million against the remaining book value of the Homebase brand name.
• Stock write-downs of £37 million, relating to excess, unsuitable and display stock, and store closure provisions of £40 million.
• A write-down of BUKI deferred tax assets of £53 million, reflecting a more conservative outlook for the business, to be reflected in the Group’s income tax expense. 

Download the official press release here

Wesfarmers Managing Director Rob Scott said 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.” 

BUKI review and impairment

The review is focused on options to improve the trading performance of Homebase as well as further evaluating the performance of the pilot stores to inform the future plans for BUKI.

“We will take a disciplined approach to further capital deployment in BUKI and provide an update on the outcomes of the business review and our plans for a broader conversion to Bunnings at our Strategy Briefing Day in June,” Mr Scott said. The non-cash impairment of £454 million ($795 million) before tax reflects the current trading performance of Homebase and a moderated outlook for BUKI. 

BUKI management update

After a 25 year career with Bunnings, most recently as Managing Director of BUKI, Peter J (PJ) Davis has announced his retirement from the business. The strong credentials of the new leadership team means Mr Davis’ retirement will result in a smooth transition and the business will be led by Damian McGloughlin, who has been appointed Managing Director of BUKI, reporting to Bunnings Group Managing Director Michael Schneider.

Damian has more than 30 years’ experience in the UK home improvement and DIY market. A number of other senior leadership appointments including David Haydon as Chief Operating Officer have been made to strengthen the BUKI team and provide additional local experience and expertise. “PJ has been instrumental in driving the growth and success of Bunnings for the past three decades and in the establishment of the Bunnings Warehouse format in Australia in the 1990s,” Mr Scott said. Mr Schneider said he was grateful for the contributions Mr Davis has made to the Bunnings organisation and the culture of the business.

BUKI first-half FY2018 earnings

BUKI is expected to report an underlying loss before interest and tax of £97 million ($165 million) for the first-half of the 2018 financial year. “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.” 

Pilot store program update

The first Bunnings pilot store opened in February 2017 and there are 19 pilot stores currently trading. The early results from the pilot program have been encouraging, although sales uplifts achieved moderated during the winter months. The business will continue to use the pilots to test, learn, iterate, and improve the offer and roll-out process.

“Through the pilot program, we have identified ways to reduce the capital expenditure and duration of the conversions,” Mr Schneider said. “As a result, we are reviewing plans for the roll-out of Bunnings across the network, which will include a small store format in addition to the warehouse format.

“We will continue to monitor the profitability of the first tranche of pilot stores over the remainder of the 2018 financial year. Achieving proof of concept for the Bunnings format is a precursor to executing a broader roll-out plan.” 

Insight & Analysis - Steve Collinge

Wesfarmers have destroyed the Homebase business and we are certain they will announce their exit from the UK and Irish market at their Strategy Briefing Day in June.

Read what we think will happen to Bunnings in 2018 here.

Source: Insight DIY Team & Wesfarmers press release

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