WES Wesfarmers Limited

By Rebecca Thurlow 

SYDNEY--Australian retailer Woolworths Ltd. and U.S. partner Lowe's Cos. are exiting their unprofitable home-improvement store venture, which has struggled to take market share from rival Bunnings.

Woolworths said Monday that it plans to buy Lowe's 33.3% stake and then either sell or liquidate the business, which includes more than 50 warehouse-style stores across Australia.

Woolworths and Lowe's have plowed roughly three billion Australian dollars (US$2 billion) into the Masters Home Improvement chain since 2011, hoping to capitalize on a booming housing market that has spurred spending on home projects.

The chain has struggled to compete against Bunnings, owned by Australian conglomerate Wesfarmers Ltd., missing its target of breaking even within five years. Masters reported a full-year loss of A$246 million for fiscal 2015.

"Our recent review of operating performance indicates it will take many years for Masters to become profitable," Woolworths Chairman Gordon Cairns said. "We have determined we cannot continue to sustain ongoing losses from this business."

Lowe's Australian exit comes as it is benefiting from higher home values in the U.S. and more people moving into new homes. The company reported a third-quarter profit of $736 million, a 26% increase from a year earlier.

Lowe's expects to record a noncash impairment charge in the fourth quarter for exiting the Woolworths venture. The company's investment to date in the venture was $930 million.

Australia, with its relatively small population of around 23 million, spread out over a huge continent, struggles to sustain a large number of major players in any industry.

Woolworths, which makes most of its profits from grocery stores, came to the A$40 billion home-improvement market late, making it difficult to compete with Bunnings, which opened its first store 20 years ago and now has more than 236 stores.

"We believe the big-box [warehouse] format can only attain around 15% of the market and Bunnings already has that," said Commonwealth Bank of Australia analyst Andrew McLennan, adding that the business opportunity was "smaller than Woolworths anticipated."

In an industry made up mostly of smaller operators, Masters aggressively rolled out new stores before making sure customers wanted to buy what it was offering, Mr. McLennan said. That included a decision to align its products with Lowe's U.S. hardware stores--meaning it was selling products and brands unfamiliar to most Australians.

Wesfarmers on Monday announced plans to expand its hardware business offshore, in a A$705 million deal to buy U.K.-based Homebase and build the Bunnings brand there.

Woolworths said it would prefer a trade sale of the Masters business but hadn't yet received any approaches from interested parties, leaving the possibility of large write-downs if the business is liquidated. Still, investors appeared pleased at the prospect of being freed from the struggling business, sending Woolworths' shares up 5% in midday trading in Sydney.

Mr. McLennan said Woolworths may sell individual stores to buyers such as Bunnings or Costco Wholesale Corp.

"But for the A$3 billion that's been sunk into the business they'll probably get very little out of it," Mr. McLennan said.

Write to Rebecca Thurlow at rebecca.thurlow@wsj.com

(END) Dow Jones Newswires

January 18, 2016 07:42 ET (12:42 GMT)

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