In an overnight report the Merrill Lynch analyst said he was concerned that over the past two to three years Woolworths had experienced a marked slowdown in earnings growth despite high level of investment in the business by management.

Mr Errington said over the past six years, Woolworths has spent $13 billion on investing activities or $2.17 billion per year. In terms of money spent on investing activities over depreciation, Woolworths has spent on average $1.48 billion per year.

He said this high investment spend came at a time that it was making a risky move into the highly competitive hardware space.

"We are concerned with Woolworths' entry into the hardware market … particularly as it starts (from scratch) against well established and powerful competitors," Mr Errington said in his note.

"It is important to note that the competition to Masters (Woolworths) is not just Bunnings … it is also against the likes of Harvey Norman, The Good Guys, IKEA, etc, although Bunnings will clearly be the largest of Masters' competitors."

A spokeswoman for Woolworths said the supermarket group had been criticised for decades for a number of new initiatives which had proven to be highly successful for the company.

She said analysts had taken point with its Project Refresh strategy to cut costs from its supply chain and operations, its decision to buy and roll out the Dan Murphy's wine store and its purchase of hotels group ALH.

She said Woolworths had proven a strong track record in taking calculated risks.

The Woolworths spokesman added inititial sales at the first Masters store in Melbourne had beaten expectations with the McDonald's cafe in the outlet selling out of buns due to the rush from shoppers.

Woolworths plans to open as many as 150 Masters stores across the country over the next few years. The hardware operation is a joint venture between Woolworths and US hardware company Lowe's.

Mr Errington said he estimated each Masters store could lose roughly $6 million in pre-tax earnings if sales were to only reach $20 million.

He said despite Woolworths previously stating that its plans in hardware were progressing well, it announced at its 2010-11 financial result that it anticipated start-up costs for Masters of up to $100 million.

To us the figure of $100 million in EBIT losses in year one (2012) seems unusually large given that only seven or eight stores will have been opened (with most of those stores only operating for 6 or so months).

"When looking at Bunnings, its general admin costs are $50 million and its advertising costs are $75 million … which we consider fixed costs. And this is on a store network of 176 warehouses. This compares to Masters with estimated losses of $100 million EBIT in its first year … with a low number of stores."

Last week Masters chief executive Don Stallings said the home-improvement and hardware retailer would generate more than $23 million in annual sales from each store. He said commentary that sales by some Masters stores would be under $20 million a year was inaccurate.

"I even saw some analysts put it at $19 million and I had a chuckle because obviously we wouldn't be spending this kind of money with this kind of expansion if we were only going to dabble at $19 million," he said.

egreenblat@theage.com.au