Big W joins growing club of retail orphans


Banducci said selling the business was an alternative that Woolworths was open to. But he noted that any would-be buyers would take the same actions that Woolworths is now proposing.

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But try selling a 183-store, loss-making discount department store chain in a market where consumer confidence is weak, competition is fierce, the market is crowded and online sales are growing at a much faster rate than bricks and mortar.

And then give Wesfarmers boss Rob Scott a call and ask him about the challenges of dealing with his company’s long-time loss-making discount department store chain, Target. Having converted a number of Target stores into Kmarts, the company is now making a small profit.

It certainly looks like Banducci is undertaking a pre-sale renovation to slim down the business in the hope that it might attract some buyer attention.

Of course the other alternative was to bite the bullet and close the entire business. Woolworths has form on this – it exited its loss-making Master’s home improvement business back in 2016.

But with $2.7 billion of lease commitments in Big W’s network, such a move would be considered rash.

Just dealing with the 30 least-profitable Big W stores will cost the group $270 million. (On top of this is another $100 million in non-cash impairments that reflect the recognition of lower margins from the business.)

When asked whether the effort to resuscitate Big W was worth it, Branducci said simply: “We don’t have any alternatives in truth.”

That is the truth. He can’t sell them and he can’t close them. Big W joins the growing club of retail orphans.

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Whether the closure of 30 Big W stores and a few distribution centres will be enough to make the business profitable remains to be seen.

Woolworths has been incrementally closing Big W stores for a few years but its losses have continued. Plans to move this business closer to profit have not gone to script.

The stores that will go are described as having the lowest sales per square metre and high rents.

Presumably landlords were not prepared to cut a deal to lower rents on these large-format stores, which have an average of almost 10 years remaining on their leases.

Landlords have been bombarded with retailers looking to exit leases or cut down space. From Myer to Oroton and from Just Jeans to Portmans – there is a long, zig-zagging line to landlords’ doors.

I suspect analysts won’t be adjusting their Big W models to ink a profit any time soon.

But just how Big W will convert rising sales into profits is something that was poorly explained. Banducci repeatedly used the line about seeing a path to profitability and the streamlining of Big W, which these closures will enable.

The biggest inhibitor to translating sales into earnings was getting the right stock in the right stores, Banducci said.

It’s difficult to join these dots.

It is also difficult to get a definitive answer from Woolworths on when it expects Big W to start turning a profit. If closing these stores is the key, then it won’t be for a while given it won’t take place for another two to three years.

I suspect analysts won’t be adjusting their Big W models to ink a profit any time soon.

The far bigger positive for Woolworths shareholders was Monday’s $1.7 billion share buyback, funded from the sale of its petrol business, which chairman Gordon Cairns said would result in a significant franking credit release.

No fuzziness in those numbers. Unlike the turnaround of Big W, the buyback is bankable.

Elizabeth Knight comments on companies, markets and the economy.

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