Mounting losses from the "dated and tired" Big W chain has prompted Woolworths to attempt its third turnaround plan for the struggling discount retailer in four years and sparked sharp price cuts in a bid to lift sales.
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Big W rained on Woolworths' parade on Wednesday by blowing out to a $150 million loss for the 2017 financial year, $35 million deeper than the worst-case scenario forecast in May, dampening positive sales growth news coming out of its core supermarket business.
Woolworths expects to lose at least another $150 million on Big W this year and has not ruled offloading the discount department store.
Chief executive Brad Banducci conceded he would be getting "very challenging" questions from investors about the chain's future, and did not rule out selling it like Woolworths did with its Masters home improvement chain.
"All of our focus is on getting some sales momentum in the group," he told Fairfax Media.
"What happens going forward, we'll wait and see."
Big W managing director David Walker said an almost 6 per cent drop in sales drove the business deeper into the red, while cutting prices had crimped profit margins.
Everyday prices on 2000 products had been sliced about 20 per cent in an effort to combat customers' perception they did not get value for money, said Mr Walker, who has been in the role for less than a year.
"We've got to get trust back with our customers," he said.
Mr Walker said Big W would refresh its "dated and tired" stores and make children's products and homewares its core product categories, which along with cheap everyday basics, would drive customers into its stores.
Mr Banducci said there was potential for improvements in areas like stock availability and store layout. "Whether that will be enough ... time will tell," he said.
Woolworths flagged that Big W would lose at least another $150 million in 2018, promoting JP Morgan analyst Shaun Cousins to ask why it had not contained losses to 2017 and set Big W towards profitability earlier.
"You'd know some of the costs you need to incur ... why haven't you taken more pain in the second half of '17 rather than extend it and prolong it?" Mr Cousins asked on an analyst call.
Mr Banducci said Woolworths wanted to avoid the "impairments business" and did not want to spend more money on Big W before it had a clear strategy for it in place.
Woolies sales up, earnings not
Woolworths revealed on Wednesday that its was attracting supermarket shoppers at a faster rate than competitor Coles, with same-store sales growth of 3.6 per cent during 2017, compared to the 1 per cent growth Coles revealed last week.
Total sales food grew 4.5 per cent to $36.3 billion, but profit did not keep pace because of increased spending on service and price cutting, with earnings before interest interest and tax falling 2.4 per cent.
Analysts questioned if the cost of doing business had gotten out of control, but Mr Banducci said pointed out that earnings had rebounded to 13.2 per cent in the second half and would have increased by 8.3 per cent for the year without the cost of team incentive payments.
Average grocery prices fell 2.1 per cent during the year.
Mr Banducci said the supermarket chain had been price competitive with Coles for almost two years but had relied too heavily on discounting and specials. It had now moved towards lower everyday prices on core items, which would improve customer confidence and their perception of value.
Citi analyst Bryan Raymond said downgrades to Big W earnings were likely to partially offset consensus upgrades to Woolworths' food business.
Woolworths had made good progress turning the business around in 2017 but that there was "a long way to go", Mr Banducci said, with 2018 shaping up as an "unbelievably important" year.
Woolworths' poker machine and hotels business saw the biggest earnings growth of all its divisions, up 11.7 per cent to $232 million, while alcohol retailers Dan Murphy's and BWS saw 4.3 per cent sales growth and 3.9 per cent earnings growth.
The group's earnings before one-off costs and writedowns fell to $1.42 billion from $1.46 billion. Bottom line net profit swung to $1.53 billion from a $1.23 billion loss in 2016, when it booked $3.2 billion in impairments related to Big W and Masters.
Woolworths announced a final dividend of 50?? per share, bringing the full year dividend to 84??, up 9.1 per cent on last year. Shares closed down 0.1 per cent at $26.80.
