Wesfarmers' British Bunnings adventure isn't working and now there's a $795 million writedown

Chris J Ratcliffe/ AFP/ Getty Images

Wesfarmers is writing down its UK push into the home hardware business with a non-cash impairment of £454 million ($A795 million) before tax against the acquisition of Homebase.

The company says the Bunnings UK business is expected to report an underlying loss before interest and tax of £97 million ($A165 million) for the first half of 2018, reflecting the poor trading performance of Homebase.

Wesfarmers paid £340 million ($A704 million) for Homebase, the British home improvement retailer and garden centre, two years ago.

The plan was to turn Homebase, with its premium prices and low promotion budget, into a Bunnings branded network in three to five years with Australian-flavoured warehouse low prices.

Homebase, founded by supermarket chain Sainsbury’s in the 1970s, is the second largest home improvement and garden retailer in the UK with 265 stores and reported annual revenue of £1.461 billion ($A3 billion).

The first Bunnings pilot store opened in February 2017 and there are 19 pilot stores currently trading. Wesfarmers says early results from the pilot program were encouraging but sales growth in the winter months was moderate.

At midday, Wesfarmers shares were down 4.7% to $42.06.

“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,” says Wesfarmers Managing Director Rob Scott.

“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.”

Peter J Davis, Managing Director of Bunnings UK, will retire after 25 year career with Bunnings. He will be replaced by Damian McGloughlin, a former retail director of B&Q, a home handyman store in the UK.

Wesfarmers has also assessed the carrying value of its investment in Target, resulting in a non-cash impairment of $306 million before tax, to be applied against the brand name ($238 million), remaining goodwill of $47 million and property and equipment ($21 million).

“The impairment of Target reflects difficult trading conditions in an increasingly competitive market,” says Scott.

“Target’s earnings have stabilised and the business will continue to leverage the Department Stores structure to support its future performance.”

Target, despite a decline in sales in the first half of 2018, is expected to report earnings before interest and tax of $33 million, an improvement of 13.8%.

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