Woolworths has confessed to struggling with basic operational issues with its incursion into the $42 billion hardware sector - from a blowout in wages and selling unwanted stock to what store managers should do with the keys at the end of each day.
The chief of the loss-making Masters chain, Melinda Smith, said not even the experience and reach of its US joint-venture partner Lowe's had prevented it from making early mistakes - with the fact that Christmas in Australia fell in summer, and not winter as in America, just another headache it had to contend with.
"With a new business as a start-up, a lot of these things, including the stock that you need to order, including every single process that we write ... including what does the store manager do with the keys at the end of the day ... It's all built from scratch, and so there's a lot that you don't know," said Ms Smith.
"We didn't know a lot about the seasonal curve. We've got a great joint venture partner in America but when it's Christmas time over there it's also winter.
"Our Christmas time lines up with spring and Father's Day so it's quite a different seasonal curve and there's no doubt there's a heap of opportunities to better capitalise on that." Ms Smith and Woolworths finance director Tom Pockett were forced to lay out all the challenges besetting Masters to analysts on Thursday, admitting actual losses would be more than expected when the chain was launched two years ago. Woolworths chief executive Grant O'Brien did not attend the investor update, where the market was advised that hardware losses would rise to $139 million from a forecast $81 million for 2012-13. Mr O'Brien is thought to be travelling overseas for work. Masters is now expected to record a pre-tax loss of $157 million for the last financial year against an original target of $119 million.
The business ran foul of optimistic sales projections for its stores that were up and trading as it went into fiscal 2013, while relatively higher wage costs for new store openings and lower margins had dragged Masters further away from its earnings targets.
Danks, Woolworths' wholesale hardware business, has also suffered from similar factors and would see its 2012-13 pre-tax profit more than halve to $18 million.
The profit warning for Masters overshadowed an actual improved guidance for the Woolworths group, with profits now forecast to grow in the range of 5 per cent to 6 per cent, from previous guidance of 4 per cent to 6 per cent. Its sale last year of Dick Smith would realise total proceeds of $94 million and allow it to book a profit on the deal of $7.9 million.
Shares in Woolworths fell 1.1 per cent to $33.32.
Masters - Stores 25
Ave households per store
Bunnings - Stores 211
Ave households per store
Mitre 10 4%