Woolies ponders future of Big W

WOOLWORTHS could be forced to shutter a third of its Big W stores at a cost of almost $800 million as intense competition takes a toll, industry experts say.

The loss-making general merchandise retailer continues to perform below the company’s expectations, they say, and is saddled with $2.7 billion in lease commitments.

In a research report for investors, analysts at Macquarie Wealth Management have run the rule over the discount department store.

It comes in the lead up to an expected trading update on the struggling chain from its parent company, led by chief executive Brad Banducci, in the next few weeks.

The report argues Big W should eventually return to profitability, therefore not justifying a complete closure.

A more logical and costeffective strategy would be to “cut the tail” and drastically reduce the 183 stores operating across Australia, it says.

The chain has been underperforming and ringing up big losses as it faces intense competition in the sector, especially from Kmart and Target, both owned by rival retail group Wesfarmers.

Last financial year, Big W posted a loss before interest and tax of $110 million. It followed a loss of $151 million the previous year.

For the first half of this financial year — traditionally a stronger half for retailers as it takes in the pivotal Christmas trading period — the chain lost $8 million.

Over the same period, Kmart and Target chalked up combined earnings before interest and tax of $383 million, excluding the impact of the sale of the Kmart Tyre and Auto Service business.

In their report, Macquarie analysts said a closure of the most unprofitable Big W stores and those with shorter leases was “more likely’ than a complete shutdown of the chain.

“Given significant closure costs for the portfolio, a more likely scenario is Woolworths to close up to one-third of its stores (60 stores), in our view,” they said.

“This cost could be around $759 million.”

The analysts said the final bill would hinge on “the lease term remaining on these problematic sites” and whether landlords would accept a discount given potential alternative uses for the sites.

“The market may like the removal of uncertain downside given the challenging industry outlook,” the report said. Macquarie argues half the Big W stores are in markets that are proving challenging.