Future looks gloomy for Big W

As Woolworths announces its results today, one line of questioning may continue to focus on its discount department store Big W.

Further details released in recent weeks of the Big W stores that would close has thrown further weight behind the theory that the group will stage an exit from the business overall.

It comes after an earlier announcement in April, suggesting that 30 stores would be shut to boost profitability.

A theory is that the demerger of its Endeavour drinks unit would fund the closure of Big W, which analysts had previously estimated would cost more than $2 billion.

The view of some is that the more logical way to distance itself from the space would be to close stores as leases expire.

It comes only after Woolworths made an exit from its Masters hardware operation and as it signals a more deliberate focus on the grocery business.

In June, there was speculation in the market that a plan was afoot by Woolworths to package up its best performing Big W stores to sell to a potential buyer.

The talk in the market was that UBS was making the efforts, despite sources close to the Swiss bank saying this was not the case.

But parties in the market say that they have been sounded out by investment bankers in recent months testing potential interest in Big W, with UBS identified as behind the move.

The theory was that about 40 of the best stores were to be packaged up and sold within its portfolio of about 182, prompting some to make the conclusion that the remaining stores would be shut down. Yet finding a buyer for even strong performing stores appears to have been difficult to achieve.

Two years ago, Goldman Sachs had a mandate to sell the business, but then it won a role for its competitor to demerge supermarket giant Coles from Wesfarmers, and UBS and Citi became Woolworths’ bankers of choice.

The Big W business has been losing money, with it on track to slip $100 million into the red this financial year as it loses business to online retailers and other competitors.

Lower prices for products sold in discount department stores are needed to be competitive, but it makes it harder for retailers to cover costs.

This week, rival Wesfarmers proved all retailers in the space were struggling, revealing that sales growth had fallen 1.5 per cent during the financial year.

Big W posted a full-year loss of $110m for the 2018 fiscal year, a loss of $151m in 2017 and a loss of $8m for the first half of this year.

The underperforming general merchandise chain is forecast to report a loss again for fiscal 2019, with the guidance indicating it would be under the $110m loss recorded in 2018.

Macquarie Group analysts say the cost of the Big W network closure would be $2.3bn, with losses running at about $330m a year to justify the outlay.