Warnings Woolworths could be forced to shut one-third of Big W stores

Woolworths could be forced to close a third of its Big W stores, at a cost of nearly $800 million, as the loss-making department store continues to underperform, experts have warned.

Woolworths could be forced to close down a third of its Big W stores at a cost of almost $800 million, industry experts say.

The loss-making discount department store 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 ruler over Big W.

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Woolworths could be forced to shut a third of its Big W stores.

It comes in the lead up to an expected trading update on the struggling chain from its parent company in the next few weeks.

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

A more logical and cost-effective 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 for a number of years as it faces intense competition in the discount department store space, 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.

The chain lost $8 million in the first half of the year.

In their report, Macquarie analysts said that 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.

“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.

“Big W is highly exposed to regional areas … it is unlikely these locations will enable Big W to regain the momentum required for profitability,” the analysts said.

“In a challenging retail environment, we see a reduction in store count as the most likely outcome from the review.

“Given the format of Big W stores, we believe it would be difficult to reduce space as Myer is doing and that outright store closure is more likely.”

The discount department store sector has also created headaches for Wesfarmers.

While Kmart made a stunning return to form this decade under former managing director Guy Russo, Target has struggled.

Three years ago, Wesfarmers bundled both businesses into the one division under a restructure designed to help bolster Target’s fortunes.

Mr Russo oversaw the enlarged division, but stepped down from that role last November.

Shares in Woolworths closed steady today at $30.23. Wesfarmers shares climbed 0.4 per cent to $34.56.