Struggling department store chain Big W could be forced to “cut the tail” by shutting up to one third of its 183 stores in order to return to profitability, according to analysts.
Macquarie Wealth Management said in a client note on Friday that closing 60 stores would come at a massive cost due to the existing $2.7 billion in lease commitments, The Australian reports.
Woolworths is due to give an update in coming weeks about the future of the troubled general merchandise retailer, which lost $110 million last financial year and $8 million in the first half of 2019.
“Partial closure of the most unprofitable and shorter lease stores is more likely,” Macquarie said in the note, according to The Australian.
“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.”
Macquarie said the ultimate cost would “come down to the lease term remaining on these problematic sites and whether the landlord would accept a discount given potential for alternate use, etc.”
“The market may like the removal of uncertain downside given the challenging industry outlook,” it said.
Macquarie said half of Big W’s stores were located in challenging regional areas. “It is unlikely these locations will enable Big W to regain the momentum required for profitability,” it 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.”
A Woolworths spokeswoman said, “At our half-year results in February we announced a national review of our Big W store and distribution centre network.
“The review is ongoing and no decisions about our network have been made. We will update our team members and the market once the review has been completed.”