Corbett kicks off Woolworths demerger with a warning that profits will tumble

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The Independent Online

Gerald Corbett's first official task as chairman of the demerged Woolworths yesterday was to deliver a stinging profits warning. The listing details for the sweets and toys retailer were published, to enable it to be demerged from its parent Kingfisher.

Woolworths immediately cautioned that profits would be well down this year, as it struggles to cope with goods overstocking of £100m, measured at cost price. Promotions, discount sales and supplier returns will be used to tackle the overhang.

It also emerged that Mr Corbett is likely to receive £440,000 in salary this year, not £375,000 as previously thought. This is because he has been given a supplement for not participating in the company pension scheme. He is also in line for a £500,000 bonus after the demerger. The shares are set to begin trading later this month, valuing the company at around £400m.

Mr Corbett, the former chief executive of Railtrack, said: "We need to get back to basics. All the effort in the last two years has been put into driving sales and operating disciplines have slipped."

Since 1998, sales have increased from £2.1bn to £2.5bn last year. However, operating profit over the period has crashed from £144m to £95m. Yesterday's news led to another round of earnings downgrades.

Paul Smiddy, an analyst at Credit Lyonnais, now forecasts operating profits for the current year of just £53m. "You couldn't wish for a less favourable set of circumstances for a demerger; if this was an IPO, it would have been called off," he said.

Woolworths will scale back its new store opening programme and close its unsuccessful e-commerce operation. It is also saddled with £200m of debt offloaded by Kingfisher.

Ian Macdougall, an analyst at Williams de Broe, said: "There is a huge question mark over Woolworths. Delivering a profit recovery is harder in this constrained economic environment."

Mr Corbett also revealed ambitious plans to expand in the health and beauty market once the group has stabilised. The company plans to roll out these products, initially sourced from Superdrug, across some 200 stores over the next two years.

The demerger will be worth around £1.1bn to Kingfisher, which will be left as a DIY and electrical retailing group.

Mr Corbett said that he was "disappointed" Jonathan Fry, who was offered a non-executive position, was not on the Woolworths board. However, it is believed the offer was withdrawn after Mr Fry, formerly a chairman of Burmah Castrol, publicly backed Mr Corbett in a row with Kingfisher's chief executive, Sir Geoff Mulcahy.

In yesterday's documentation, it emerged that Christopher Rogers, Woolworths' finance director, could be granted up to £675,000 worth of share options, while another director, Keith Fleming, is in line for £780,000, subject to the company meeting certain performance criteria.

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