The Woolworths Group Ltd (ASX: WOW) share price has fallen 0.8% to $30.60 today after it announced on Monday that shareholders will receive the proceeds of the sale of its petrol business to EG Group via a $1.7 billion off-market buy-back.
Big W store closures
Woolworths also announced that it has concluded its Big W network review. The company has identified around 30 Big W stores that are set to close over the next 3 years and 2 distribution centres that will close at the end of their leases. The proposed store closures would represent around 16% of Big W's current store network.
The closures will cost Woolworths approximately $370 million pre-tax and are expected to be recorded as a significant item in the company's FY19 result. The breakdown of the cost consists of a profit & loss charge of around $270 million which is primarily related to lease and other store exit costs plus a $100 million asset impairment.
The impairment will reflect "a more conservative level of margin recovery" that the company expects from its Big W business and takes into account current trading conditions and the outlook for the broader sector including the acceleration in online sales.
The cash cost for the closures will be around $250 million, with the majority of the outflow from store exits expected to occur in FY21 and FY22.
Big W's lack of profitability has been an issue for Woolworths over the last couple of years. In FY18, the business reported a loss before interest and tax of $110 million. Despite strong transaction growth underpinning comparable sales growth of around 6% for the third quarter in FY19 (not adjusted for Easter), the conversion to earnings has been below management's expectations. As a result, Woolworths expects the Big W division to report a loss before interest and tax of between $80 and $100 million in FY19.
Foolish takeaway
The decision to close 16% of the Big W store network is an attempt to make the business profitable as it continues to lose money amid a background of subdued consumer confidence and intensified competition from online-only retailers. Over the last couple of years, sales have fallen and margins have contracted with Big W last recording a profit in FY15.
Other department store chains such as the Wesfarmers Limited (ASX: WES) owned Target and Myer Holdings Limited (ASX: MYR) have also struggled in the current environment as the significant shift by consumers to online purchases is hurting the traditional bricks and mortar business model.
The market has reacted positively to the announced buy-back and the store closures at Big W with the Woolworths share price hitting an 8 month high on Monday. However, the valuation is starting to look expensive for a business that is expected to grow earnings modestly with Woolworths currently trading at 22 times FY20 earnings.
