Gordon Cairns has said he will be guided by the facts in his decision over Masters Photo: Louie Douvis

Australia's largest retailer could release billions of dollars in capital if it cuts its losses with Masters, sells BIG W and goes back to being a food-and-liquor retailer with a strong gaming operation.

This would repair Woolworths' battered brand and restore the retailer as one of the country's highest-cash-generating businesses, according to outspoken analyst David Errington.

The Bank of America Merrill Lynch analyst estimated more than $1 billion of working capital and $3 billion of capital could be released, and cash realisation could return to more than 110 per cent "if Woolworths were to exit home improvement and BIG W and revert to being a high-cash-generating supermarket operator."

"This potential cash realisation opportunity is what we see as Woolworths' treasure chest," Mr Errington said.

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"A supermarket business that can sell inventory for cash, well before it has to pay for the goods, is a strong cash-generating business," Mr Errington said.

"If Woolworths' like-for-like sales growth in Australian food [alone]could get back to 3 per cent, we estimate that this would increase cash received by around $400 million per annum."

Mr Errington was quite critical of Woolworths' former chief Grant O'Brien and chairman Ralph Waters and their commitment to the Masters hardware business, which he said had "compromised the competitiveness of the high-cash-generating supermarket business".

Merrill upgraded its rating on Woolworths from "underperform" to "buy" on the day Mr O'Brien resigned, and in its latest analysis Mr Errington said he was confident the past strategy would be "reversed", unlocking significant cash-generating capacity within the company.

Retail analysts have strained to read the smoke signals over Masters since Gordon Cairns stepped up as chairman in August and stated he would make a decision on Masters "guided by the facts".

Mr Cairns is understood to have repeated this message in his discussions with analysts, saying "the numbers will determine the decision".

One of the big numbers is the cost of buying Lowe's put option, which is thought to be worth as much as $1 billion, and unwind the agreement with the United States retailer that underpins the Masters operation.

In a report earlier this year, Citi analyst Craig Woolford estimated it would cost Woolworths $1.6 billion to exit Masters, including the cost of clearing inventory, exiting leases and the put option.

But Citi said Woolworths would also recoup as much as $970 million from selling Masters properties and inventory, resulting in a net loss of  $300 million to $900 million.

The resignation of two of Woolworths' most experienced directors last week, former Tesco executive Christine Cross and one-time Kellogg chief David MacKay, effectively gave Mr Cairns "control" of the board, according to one market watcher.

Former Reserve Bank governor Ian Macfarlane quit the Woolworths board back in March and is yet to be replaced.

It's understood Mr Cairns is interviewing for three new board directors in coming weeks and, along with the yet-to-be-announced chief, these new appointees will account for four of the seats on the 10-person board

Market watchers claim these fresh directors will entrench Mr Cairns' control  and clear the board of any historical issues in relation to Masters.

Sources close to Woolworths management suggest there are two conflicting theories on the best course of action for Masters. 

The first is that Woolworths is a supermarket business and it should go back to the basics and leverage this rich experience.

Contrary to this are concerns a new owner of Masters could reap the rewards of the $43 billion home improvement market in Australia and leave Woolworths looking foolish.