March 31, 2019 / 11:46 PM / 4 months ago

UPDATE 2-Australia's Woolworths to shrink Big W division as turnaround lags

* Woolworths to shut 30 Big W stores

* Discount dept division has posted losses since 2016

* A$1.7 bln buyback details announced, shares hit 8-month high (Writes through; adds comments from CEO and analyst)

By Tom Westbrook

SYDNEY, April 1 (Reuters) - Woolworths Group Ltd will shut about a sixth of its loss-making discount department stores over the next three years, Australia’s biggest grocer said on Monday, while not ruling out a sale of the long-underperforming division.

The Big W shops, which sell items from clothing to camping gear, kitchen appliances and televisions have been a drag on Woolworths’ profitability since their falling profits in 2014 turned to mounting losses three years ago.

The division has been in turnaround mode since, without gaining much traction. The announced exit from 30 stores at a cost of A$270 million ($192 million) illustrates both missteps along the way and the toughness of the market, investors say.

Prioritising range to chase margins, rather than investing in lower prices, drove a slow attrition in customers, said Jason Teh, Chief Investment Officer at Vertium Asset Management, which previously owned Woolworths’ shares but sold them in February.

“It means at some point you are going to have to hit the big reset button,” Teh said. “The business is not making any profits, this is removing some of that drag,” he said, referring to the store closures.

Woolworths operates 1,008 supermarkets and 183 Big W stores in Australia. It also owns 181 supermarkets in New Zealand.

The company also announced details of a previously flagged A$1.7 billion share buyback, as it hands back the proceeds from selling its petrol station network in November.

That lifted Woolworth shares 2 percent to an eight-month high, while the broader market rose 0.6 percent.

SMALLER W

The shrinking of Big W - with two distribution centres to also close along with the stores - comes as retailers across Australia are under immense pressure. The sharpest real-estate downturn in a generation has prompted a matching pullback in consumer spending.

First-half earnings slipped at previously outperforming rivals, Kmart and Target, which are owned by Wesfarmers Ltd and have a market share of nearly 50 percent, according to research firm IBISWorld, compared with about 20 percent for Big W.

“The whole sector is relatively challenged right now,” Woolworths Chief Executive Officer Brad Banducci said in a conference call.

The division lost A$110 million in the 2018 financial year - less than the A$150.5 million it lost a year earlier.

Woolworths expects the loss to narrow further this year, but also flagged a A$100 million non-cash impairment owing to the gloomy outlook.

Banducci said the company was “open to alternatives” regarding the ownership of Big W, but that its primary focus was to accelerate its lagging turnaround, adding sales in its fiscal third quarter had grown.

“Our customers are starting to vote with their feet,” he said. “Translating that sales and transaction growth into profit is where the focus is right now.” ($1 = 1.4075 Australian dollars) (Reporting by Tom Westbrook in Sydney. Additional reporting by Aditya Soni in Bengaluru; Editing by Stephen Coates and Muralikumar Anantharaman)

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