SYDNEY (Reuters) - Retail giant Wesfarmers Ltd (WES.AX) wrote off British hardware chain Homebase for more than its purchase price, saying on Monday it had made a series of mistakes that serve as another cautionary tale for Australian firms expanding overseas.
Wesfarmer’s write-off of Homebase, which it bought for A$705 million two years ago, accounted for almost all the A$1.3 billion (£708 million) of impairment charges it announced on Monday, triggering the steepest daily drop in its stock in just over a year.
Managing Director Rob Scott said Australia’s largest retailer by revenue had made several “self-induced” blunders after buying Homebase, including dropping popular lines for kitchens and bathrooms and underestimating winter demand for a range of items from heaters to cleaning and storage.
“A lot of the underlying causes of the losses we’ve reported today have been through our doing,” he told analysts and investors in a conference call after the announcement. “Similarly we see an opportunity to undo some of those issues and improve performance.”
Homebase is Perth-based Wesfarmers’ first foray into Britain. The company was seeking to replicate the success of its hardware business Bunnings, the market leader in Australia, but instead joins the ranks of other Australian companies that have struggled abroad.
National Australia Bank Ltd (NAB.AX), one of the nation’s largest, quit Britain in 2016 after struggling with an acquisition of Clydesdale Bank, and law firm Slater & Gordon Ltd (SGH.AX) made an A$876.5 million writedown on its British acquisition in 2016.
“It doesn’t matter how big you are here, the challenges when you move offshore are substantial, even when you buy an existing business,” said James McGlew, executive director of Perth stockbroker Argonaut Ltd, which owns Wesfarmers shares.
The stock touched a three-month low in early trade, and closed 4.5 percent lower, as the broader market dropped sharply on fears of rising U.S. interest rates.
Bunnings has posted double-digit growth for the past two quarters, easily fending off a challenge from would-be rival Masters, a short-lived joint-venture between Australia’s Woolworths Group Ltd (WOW.AX) and U.S.-based Lowe’s Companies Inc (LOW.N).
Homebase, by contrast, is expected to post a half-year underlying loss of A$165 million for the six months to Dec. 30, Wesfarmers said, adding that it planned to close up to a sixth of its 234 stores in Britain. It did not give a timeframe.
Homebase is currently under a review due to be finished in June, managing director Scott said. A sale “certainly wouldn’t be the preferred outcome” but all options were under consideration, he added.
Hugh Dive, chief investment officer at Atlas Funds Management, which owns Wesfarmers shares, said the retailer had found the British market “very different and more fragmented” than what they were used to in Australia.
Wesfarmers booked a A$795 million impairment against Homebase’s goodwill and brand name, plus another A$228 million in store closure costs, stock write-offs and tax writedowns.
The A$1.3 billion impairment included a non-cash writedown of A$306 million against struggling Australian discount department store Target.
Reporting by Tom Westbrook and Byron Kaye in Sydney. Additional reporting by Chandini Monnappa in Bengaluru; Editing by Richard Pullin and Stephen Coates