Wesfarmers (ASX: WES) has completed the first phase review of its iconic Target brand, confirming that its financial viability is not sustainable and that the majority of stores will be transformed into Kmart stores which better reflects the retail needs of Australian customers.
The decision comes as Target has continued to see declining sales with the overheads associated with its large network of 150+ stores impacting overall profitability. For the half year ending 31 December 2019, Kmart sales increased $241m but earnings were offset by the $67m decline in Target sales which were below expectation.
“For some time now, the retail sector has seen significant structural change and disruption, and we expect this trend to continue,” said Wesfarmers Managing Director, Rob Scott.
“With the exception of Target, Wesfarmers’ retail businesses are well-positioned to respond to the changes in consumer behaviour and competition associated with this disruption.
“The actions announced reflect our continued focus on investing in Kmart, a business with a compelling customer offer and strong competitive advantages, while also improving the viability of Target by addressing some of its structural challenges by simplifying the business model.”
As part of the restructure, up to 40 large Target stores will be converted to Kmart and 52 Target Country stores will be converted to smaller Kmart stores.
With not all Target stores suitable for conversion, there will be closures of 10-25 large Target stores and 50 Target Country stores. There will also be a significant reduction in the size of Target’s head office.
Key to the decision to convert stores to Kmart has been significant growth in its budget-friendly products, as well as online sales.
“The reduction in the Target store network will be complemented by increased investment in our digital capabilities, following the continued strong growth in online sales across the Kmart Group and the pleasing progress in Catch since its acquisition in August 2019,” said Scott.
Through their increased digital channels, Australians will be able to purchase Kmart, Target and Catch goods online for home delivery or collection from Kmart hubs.
For staff currently employed at Target stores which are set for closure, the Company will assist with cross-brand redeployment to other Wesfarmer-owner brands such as Bunnings and Officeworks where suitable, with the Target closures to be completed in the 2021 calendar year.
Alfred Chan is a Business Reporter at The Sentiment specialising in ASX-listed small cap companies, a bloodstock enthusiast and former equities analyst.
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