Smaller Target puts Big W in crosshairs

“There are only so many people buying at that price point and going to department stores, but it should help them marginally,” he said. “But the whole group’s got the same challenges as Target, in some ways.”

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“It’s not quite as well-positioned as Kmart. Big W has a bit of the [cheaper] Kmart end and also some of the [more expensive] Target end.”

Big W has been a laggard in Woolworths’ portfolio since 2016, booking numerous losses and $286 million in impairments. In April last year, the Woolworths announced it would shutter 30 stores in an effort to make the chain viable, incurring a cost of $270 million.

But market watchers expect more than the mooted 30 stores will shut, as the coronavirus crisis exacerbates the pressures facing the department store sector. It could even kick off a long-term trend away from big-box retailing, White Funds managing director Angus Gluskie said.

“Department stores see benefits in shrinking their floor space, lowering staff numbers and condensing their offering. They are hoping that this more compact offering is not only more structurally cost efficient, but is more clearly defined for consumers,” the Woolworths shareholder said.

“It is highly likely that Woolworths would be coming to similar conclusions.”

Argo Investments managing director Jason Beddow.Credit:Jessica Hromas

Shutting more unprofitable stores and condensing their offering would be the most likely options Woolworths is considering, Mr Gluskie said.

Mr Beddow agreed, saying the 30 stores slated to close would be just the “tip of the iceberg”. So far, four stores have been closed. “As leases expire, unless they’re profitable [they’ll shut],” he said.

However, any major changes at Big W will likely wait until Woolworths decides its plans for its Endeavour hotels and drinks division, Mr Beddow said. The company has left the door open for nixing the much-anticipated demerger altogether following the coronavirus crisis.

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In February, Big W posted a $50 million profit before interest and tax, its first since 2016 and an indication to analysts the department store was beginning to turn a corner after years of being valued at near-zero within Woolworths’ portfolio.

Analysts now believe the chain may post a profit, with Merrill Lynch analyst David Errington telling clients in late April full-year earnings before interest and tax for the department chain would be $20 million.

Woolworths has told investors it expects to make a small profit in the full financial year. A spokesperson told The Age and The Sydney Morning Herald the company had been pleased with its recent efforts to turn Big W around.

“Our customers tell us they like what we’re doing and our focus remains on meeting their needs to build a strong and sustainable business for the future,” they said.

On Monday, Woolworths shares rose 1.1 per cent to $34.55 and Wesfarmers jumped 1.7 per cent to $39.50. The broader market leapt more than 2 per cent.

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