A bit of sweet to smooth out the sour at Woolworths yesterday.
Nothing like a ‘bribe’ to convince shareholders that an expensive failure is being fixed – when it isn’t.
That might sound a little harsh, but that’s what the announcement yesterday from Woolworths of a massive restructuring of its loss-making Big W department store chain and hundreds of millions of dollars in losses and a $1.7 billion share buyback looks like.
The hacking away at Big W was telegraphed previously by the retailer, as was the buyback which will use the proceeds from the sale of its petrol station business.
Woolworths revealed will take a $370 million hit in its full-year results after deciding to close about 30 of its Big W discount department stores over the next three years, as well as two distribution centres.
A warehouse in Monarto, southeast of Adelaide, will close in the 2020-21 financial year, with one in Warwick, west of Brisbane, to follow two years later.
Woolies said that the 2018-19 results would include $270 million in lease and exit costs for closing about 16% of its department store network, plus $100 million of non-cash asset impairments.
That was despite an improvement in Big W comparable sales growth in the third quarter to around 6%.
That, however, wasn’t enough to encourage Woolies to hang on and with the turnaround at Big W taking longer the chain was forecast to report a loss before interest and tax in 2018-19 of between $80 million to $100 million, compared to the previous year’s $110 million loss.
The progressive closure will leave around 153 Big W stores across the country.
“As foreshadowed at our half-year results, while the recovery in trading for Big W is encouraging and there remains further opportunity for improvement, the speed of conversion to earnings improvement is taking longer than planned,” Woolworths chief executive Brad Banducci said in a trading update issued yesterday.
“This decision will lead to a more robust and sustainable store and DC [distribution centre] network that better reflects the rapidly changing retail environment. It will accelerate our turnaround plan through a more profitable store network, simplifying current business processes, improving stock flow and lowering inventory.”
Chairman Gordon Cairns said the company considered various capital return options after the sale of 540 service stations to a UK buyer for $1.72 billion in November.
Woolies said it had decided an off-market buyback was the best option for the company and shareholders and would result in a significant release of franking credits.
(Woolies didn’t mention it but the use of the franking credits would mean the company is another betting the ALP will win the May federal election and introduce its crackdown on the use of franking credits by people not paying tax).
Woolworths said, while shareholders would be selling back their shares at a discount of between 10% to 14% to the market price, tax implications meant the offer would make sense for some.
Woolies shares ended the day at $31.08, up 2%.
