Wesfarmers Announces Major Changes in Target, Kmart Stores
In its latest trading update, the parent company of Kmart, Wesfarmers Limited has delivered less than ideal news surrounding it's operations. Following its initial phase of a comprehensive review on Target, the firm has identified several actions to speed up the growth of Kmart while limiting the weak performance of Target. The news did not emerge as too much of a surprise as Target’s underperformance was previously flagged in its COVID-19 update back in April 2020.
Wesfarmers intends to wind up between 10 to 25 large-scale Target stores, close up 50 small-format Target country stores and undergo restructuring works for several of Target store support office. Where applicable, Target stores will also be converted to Kmart stores. More notably, the subsequent addition of Kmart stores is expected to lead to improved financial performance for the group. Nevertheless, to minimise the disruptions on its workforce, Target team members will be redeployed to Kmart and other Wesfarmers businesses.
Yet, the closures of stores fall in line with the firm’s long-term strategy. This is because the reduction in store network will be replaced with the increased investment in the firm’s digital capabilities, following the continued strong growth in online stores across the Kmart Group alongside reasonable progress in Catch since its $230 million acquisition in August 2019. This was a stark difference from a year ago when Kmart and Target’s online sales merely constituted 3 per cent of total sales in 2019.
Additionally, the firm has also provided a glimpse of its 2020 full-year results. Specifically, restructuring costs and provisions in the Kmart Group are expected to amount between $120 to $170 million, before tax. This comprises of expenses incurred as a result of Target store closures, restructuring of Target support offices as well as inventory write-offs.
A second item which will likely affect the group’s performance is a non-cash impairment in Kmart Group of approximately $430 to $480 million before tax, including an impairment of the Target brand name, the capitalised value of leases and other assets. In the 2021 financial year, Kmart Group is also expected to incur one-off non-operating costs of approximately $120 to $140 million attributable to the stock clearance activities and conversion of outlets prior to closure or conversion.
Despite the threat the COVID-19 pandemic has posed, Wesfarmers was quick to turn into an opportunity. This is evident in the space of retail businesses who have made tremendous improvements in rolling out digital offers, all while handling the influx of online sales. A fine example includes the introduction of Drive & Collect by Bunnings and Officeworks, enabling contactless carpark collection by customers. A similar initiative was rolled out by Scentre group, operator of Westfield malls, who has since introduced WestfieldDirect.
While implementing the abovementioned structural shifts will do the firm damage in the near term, Wesfarmers Managing Director believes that the actions and subsequent investments into Kmart will improve the group’s overall position all while improving Target’s commercial viability.
By Caroline Wong
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