Introduction
This case study examines a hypothetical Australian department store chain, the Group, and develops a turnaround strategy for FY2026 to FY2029. The Group operates 90 full line stores across metropolitan and regional Australia, employs about 11,400 people, and is listed on the ASX. FY2025 sales were A$1,947.0 million against A$2,140.0 million two years earlier, while earnings before interest and tax (EBIT) fell from A$115.6 million to A$24.3 million. All figures are illustrative.
The analysis establishes whether the deterioration is cyclical or structural, quantifies its causes, and evaluates four options against investment, payback and risk using the suitability, feasibility and acceptability criteria of Johnson et al. (2020). Figure 1 sets out the resulting phasing.
Case Background
The Group trades from an average footprint of 6,500 square metres, predominantly as an anchor tenant in regional shopping centres on leases of 10-15 years. Its range spans apparel, homewares, beauty, electrical goods and toys, sourced 82 per cent from national brands and 18 per cent own brand. The model was built for a market in which breadth of range and physical convenience were themselves sources of advantage.
That market no longer exists. Full line department stores are now compressed between discount and specialist chains at the value end and pure play online retailers and vertically integrated apparel brands at the convenience end, the position Porter (2008) associates with the lowest returns in an industry. Australian Bureau of Statistics (2025) data show total Australian retail turnover still growing in nominal terms while the department store category is broadly flat, so a firm losing sales here is losing share.
Problem Identification
Three interlocking problems are evident, and separating symptom from cause matters because falling sales are the outcome of earlier strategic choices, not the problem itself.
- Deteriorating revenue quality. Like-for-like growth has moved from positive to sharply negative in two years, so the decline is a demand problem within the existing network, not an artefact of closures.
- A cost base that has not followed sales down. Occupancy and labour are largely fixed, producing operating deleverage in which each dollar of lost revenue removes a disproportionate amount of EBIT.
- An omnichannel gap. Store and online inventory sit in separate pools, there is no ship-from-store capability, and the estate, the Group’s largest asset, performs no fulfilment role.
These are causally linked: the omnichannel gap depresses sales, the decline exposes the fixed cost base, and the margin compression that follows removes the capital that would fund digital investment.
Financial Analysis
Table 1 presents performance across the three years to FY2025.
Table 1: Summary financial performance of the Group, FY2023 to FY2025 (A$ million unless stated).
| Measure | FY2023 | FY2024 | FY2025 |
|---|---|---|---|
| Sales revenue | 2,140.0 | 2,061.0 | 1,947.0 |
| Cost of goods sold | 1,326.8 | 1,304.6 | 1,257.8 |
| Gross profit | 813.2 | 756.4 | 689.2 |
| Gross margin (%) | 38.0 | 36.7 | 35.4 |
| Cost of doing business | 697.6 | 694.6 | 664.9 |
| Cost of doing business (% of sales) | 32.6 | 33.7 | 34.2 |
| EBIT | 115.6 | 61.8 | 24.3 |
| EBIT margin (%) | 5.4 | 3.0 | 1.2 |
| Closing inventory | 318.0 | 342.0 | 366.0 |
| Average inventory | 311.0 | 330.0 | 354.0 |
| Inventory turnover (times) | 4.27 | 3.95 | 3.55 |
| Like-for-like sales growth (%) | +1.2 | -2.6 | -4.5 |
| Online sales (% of total) | 8.0 | 9.5 | 11.6 |
| Stores at year end | 94 | 92 | 90 |
Margin erosion and the EBIT bridge
Gross margin is gross profit divided by sales revenue. For FY2025:
Gross margin = 689.2 / 1,947.0 x 100 = 35.4%, against 813.2 / 2,140.0 x 100 = 38.0% in FY2023.
That 2.6 point contraction costs 0.026 x 1,947.0 = A$50.6 million of gross profit at current volumes. EBIT margin fell from 5.4% to 24.3 / 1,947.0 x 100 = 1.2%, a decline of 4.2 points, of which gross margin explains 2.6 and the rise in the cost of doing business ratio from 32.6 to 34.2 per cent explains 1.6. Roughly 38 per cent of the collapse therefore originates in the cost base, so a margin-only response would recover less than two thirds of the loss.
Like-for-like sales performance
Like-for-like growth isolates demand within stores trading for the whole of both periods. The 90 stores trading throughout FY2024 and FY2025 generated A$1,932.0 million against A$2,023.0 million a year earlier:
Like-for-like growth = (1,932.0 / 2,023.0) – 1 = 0.955 – 1 = -4.5%.
The FY2024 equivalent across 92 comparable stores gives (2,045.0 / 2,100.0) – 1 = -2.6%, so the rate of decline has almost doubled within an unchanged store set. Excluding online sales, revenue per square metre fell from 1,968.8 million / 611,000 = A$3,222 to 1,721.1 million / 585,000 = A$2,942, a fall of 8.7 per cent against fixed occupancy.
Cost base and operating deleverage
Table 2 decomposes the cost of doing business.
Table 2: Decomposition of the Group’s cost of doing business, FY2023 compared with FY2025.
| Cost category | FY2023 (A$m) | FY2023 (%) | FY2025 (A$m) | FY2025 (%) | Change (pp) |
|---|---|---|---|---|---|
| Employment costs | 306.0 | 14.30 | 292.1 | 15.00 | +0.70 |
| Occupancy, rent and outgoings | 239.7 | 11.20 | 225.9 | 11.60 | +0.40 |
| Marketing | 66.3 | 3.10 | 50.6 | 2.60 | -0.50 |
| Logistics and fulfilment | 40.7 | 1.90 | 49.6 | 2.55 | +0.65 |
| Technology | 24.6 | 1.15 | 29.2 | 1.50 | +0.35 |
| Other store and corporate support | 20.3 | 0.95 | 17.5 | 0.90 | -0.05 |
| Total | 697.6 | 32.60 | 664.9 | 34.15 | +1.55 |
Management cut the cost base by A$32.7 million, yet the ratio to sales rose 1.55 points because sales fell 9.0 per cent while costs fell only 4.7 per cent. Employment costs rose as a share of sales despite falling in dollars, reflecting rostering commitments across 90 stores and successive General Retail Industry Award increases flowing from the Fair Work Commission (2024) annual wage review. Occupancy behaved similarly, as long dated leases with fixed escalations left the commitment growing against a smaller revenue base.
Logistics and technology, the only categories to rise in dollars, are those tied to online trading, so the Group already pays the cost of an omnichannel model without earning its revenue. Marketing was cut 0.50 points, which Robbins and Pearce (1992) identify as retrenchment that damages recovery capacity.
Working capital and inventory productivity
Inventory turnover is cost of goods sold divided by average inventory:
Inventory turnover = 1,257.8 / 354.0 = 3.55 times, against 1,326.8 / 311.0 = 4.27 times in FY2023.
Inventory rose 15.1 per cent while sales fell 9.0 per cent, the clearest indicator of a range mismatched to demand; unsold stock is eventually cleared at markdown, so the working capital and margin problems are one seen at two points. Restoring turnover to 4.30 times would require average inventory of 1,257.8 / 4.30 = A$292.5 million, releasing A$61.5 million of cash.
The omnichannel gap
Online sales reached 11.6 per cent of revenue in FY2025, but the deficiency is architectural rather than a matter of rate. Store and warehouse inventory sit in separate pools, so stock in one channel cannot be sold through the other and the same unit is marked down twice. Omnichannel value derives from unifying inventory, information and fulfilment rather than running parallel channels (Verhoef, Kannan and Inman 2015), and stores acting as forward distribution points give network retailers a structural advantage over pure play rivals (Brynjolfsson, Hu and Rahman 2013). The Group uses none of its 585,000 square metres for fulfilment.
Evaluation of Strategic Options
Table 3 summarises the four options modelled; supporting calculations follow.
Table 3: Evaluation of strategic options for the Group.
| Option | Investment (A$m) | Annual EBIT effect (A$m) | Payback (years) | Principal risk |
|---|---|---|---|---|
| A. Network rationalisation: close 18 stores | 105.0 | +43.1 | 2.4 | Sales transfer below 30%; exit and redundancy costs exceed provision |
| B. Omnichannel and fulfilment rebuild | 142.0 | +48.5 | 2.9 | Delivery risk on a multi-year systems program; cannibalisation above forecast |
| C. Own-brand expansion and category exit | 44.0 | +21.7 | 2.0 | Supplier relationships; product safety liability under Australian Consumer Law |
| D. Price-led defence against discounters | 38.9 per year (margin) | -19.4 | Not recovered | Structural cost disadvantage against discount formats; permanent margin reset |
Option A. The 18 weakest stores generate combined sales of A$264.0 million and site level EBIT of negative A$21.4 million. On closure an assumed 30 per cent transfers elsewhere: 0.30 x 264.0 = A$79.2 million, earning contribution at the 35.4 per cent gross margin less 8.0 per cent incremental handling, so 79.2 x 0.274 = A$21.7 million. Annual benefit is 21.4 + 21.7 = A$43.1 million against one-off exit costs of A$105.0 million, so payback = 105.0 / 43.1 = 2.4 years.
Option B. Unified inventory, ship-from-store and click-and-collect lift online penetration from 11.6 to 20.0 per cent on a stabilised base of A$1,900 million, taking online revenue from A$220.4 million to A$380.0 million. Half the A$159.6 million increase is treated as incremental, contributing 79.8 x 0.274 = A$21.9 million, while unified inventory cuts markdown from 9.4 to 8.0 per cent of sales, worth 0.014 x 1,900 = A$26.6 million. Payback = 142.0 / 48.5 = 2.9 years.
Option C. Raising own-brand penetration from 18 to 30 per cent across an addressable apparel, home and beauty base of A$1,290 million shifts 0.12 x 1,290 = A$154.8 million of sales from national brands at 32 per cent gross margin to own brands at 46 per cent: 154.8 x 0.14 = A$21.7 million per year. Payback = 44.0 / 21.7 = 2.0 years.
Option D. A 2.0 point price reduction forgoes 0.020 x 1,947.0 = A$38.9 million of margin, while even a generous 3 per cent volume response adds A$58.4 million of sales at the reduced 33.4 per cent margin, contributing 58.4 x 0.334 = A$19.5 million, a net negative A$19.4 million. It is rejected: with a cost ratio of 34.2 per cent the Group cannot profitably meet formats operating below 25 per cent, and price competition initiated by the higher cost operator destroys value by construction (Grant 2021).
Recommended Strategy
The recommendation is to implement Options A, B and C as one sequenced program and reject Option D. Against Johnson et al. (2020) the combination is suitable, since A removes the fixed cost overhang, B closes the omnichannel gap, and C rebuilds gross margin; feasible, because the A$291.0 million of combined investment is substantially self-funded from the A$61.5 million inventory release and closed store asset realisation rather than an equity raising at a depressed share price; and acceptable, because the combined annual benefit of A$113.3 million exceeds any single option. Sequencing then matters, since a firm that completes cost reduction before beginning growth investment reaches stability with no proposition to grow from (Schmitt and Raisch 2013). Figure 1 illustrates the phase structure adopted.
Phase 1 executes Option A and the inventory reset, restoring cash and removing loss-making capacity while the trading proposition is untouched. Phase 2 delivers the unified inventory platform, ship-from-store fulfilment and the first own-brand ranges. Phase 3 reinvests recovered margin in loyalty analytics, a data-led category reset and a 3,500 square metre format trial. Discounting the modelled benefits by 40 per cent for continued like-for-like pressure gives incremental EBIT of 113.3 x 0.60 = A$68.0 million, which on the FY2025 base of A$24.3 million produces about A$92 million on target sales of A$1,850 million, an EBIT margin of 5.0 per cent. Progress should be reported to the board quarterly against:
- Like-for-like growth: positive by the end of Phase 2, at or above 2.0 per cent by FY2029.
- Gross margin: 37.5 per cent by FY2028, from own-brand mix and markdown reduction, not price rises.
- Cost of doing business: below 32.0 per cent of sales by FY2028.
- Inventory turnover: 4.30 times from FY2027, aged stock below 8 per cent of units.
- Online penetration: 20 per cent of sales by FY2029, at least 40 per cent fulfilled from stores.
- EBIT margin: 3.0 per cent in FY2027, 5.0 per cent in FY2029.
Risk Assessment
Transfer rate risk. Option A rests on 30 per cent of closed store sales transferring elsewhere. At 15 per cent, retained contribution falls to 39.6 x 0.274 = A$10.9 million, cutting annual benefit to A$32.3 million and extending payback to 105.0 / 32.3 = 3.3 years. Closures should therefore proceed in tranches of six, validating the assumption before the remainder are committed.
Workforce and industrial risk. Closing 18 stores affects about 2,100 employees. The Fair Work Act 2009 (Cth) imposes consultation obligations where major workplace change is proposed, and redundancy entitlements under the National Employment Standards and the General Retail Industry Award form a substantial part of the A$105.0 million provision. Understating them is the likeliest source of overrun, and inadequate consultation risks dispute exposure and reputational damage.
Regulatory risk. Closing-down sales and the accelerated markdown program must comply with the prohibition on misleading conduct in the Australian Consumer Law, and comparative “was/now” pricing has been a recurring ACCC (2024) enforcement priority. Own-brand expansion also transfers product safety and consumer guarantee liability to the Group. As an ASX listed entity the Group must also meet the continuous disclosure obligation in Listing Rule 3.1 (Australian Securities Exchange 2024): closure decisions, the associated provision and any revision to phasing each likely meet that threshold, so communications must sit inside the program timetable.
Execution and competitive response risk. Option B is a multi-year systems program of a type prone to overrunning, and slippage delays the revenue recovery that funds Phase 3, while discount formats may deepen promotion in vacated catchments. Delivering the platform in vertical slices, beginning with click-and-collect in one state, realises value incrementally. Productivity gains from digital investment also depend on complementary process and management change rather than technology alone (Productivity Commission 2023), which argues for pairing each release with operating model change in stores.
Conclusion
The Group’s difficulty is structural rather than cyclical. Like-for-like sales fell 4.5 per cent in FY2025 while the Australian retail market grew, and the fall in EBIT margin from 5.4 to 1.2 per cent divides roughly 2.6 points to gross margin erosion and 1.6 points to a cost base that fell far more slowly. Inventory turnover deteriorating from 4.27 to 3.55 times confirms a range mismatched to demand, since unsold stock becomes markdown and markdown becomes lost margin.
The recommended response combines network rationalisation, omnichannel rebuild and own-brand expansion, phased so that retrenchment funds recovery rather than replacing it, and rejects price-led defence, which destroys A$19.4 million of EBIT annually. The decisive judgement is not which options to pursue but how quickly to move, since each further year at the current trajectory removes roughly A$38 million of EBIT.
References
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Australian Competition and Consumer Commission 2024, Compliance and enforcement policy and priorities, ACCC, Canberra.
Australian Securities Exchange 2024, Guidance note 8: continuous disclosure, ASX, Sydney.
Brynjolfsson, E, Hu, YJ & Rahman, MS 2013, ‘Competing in the age of omnichannel retailing’, MIT Sloan Management Review, vol. 54, no. 4, pp. 23-29.
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