What’s the outlook for Wesfarmers following Target Review?
We examine the implications of Wesfarmers phase one Target Review.
Wesfarmers share price steady, impairments loom
Wesfarmers (WES) today announced that it had completed the first stage of its Target Review, which would see many Target stores closed and some hefty impairment charges booked.
In the broad strokes, some of the key consequences of this review include:
- The closure of between 10 to 25 large format Target stores; the closure of 50 target country stores; and the conversion of 52 Target Country stores into Kmart Hub stores
- Restructuring costs and provisions of between $120 million to $170 million, related to store closures, inventory write-offs, and staff count reductions
- Non-cash impairment charges for the Kmart Group totalling $430 million to $480 million, relating primarily to the Target brand name; as well as 'property, plant and equipment, the capitalised value of leases and other assets'
- Non-cash impairment charges of $300 million for the Groups' Industrial and Saftey Division
The conglomerate also flagged that it expected to book one-off ‘non-operating costs of approximately $120 to $140 million relating to the conversion of stores and stock clearance activity prior to closure of conversion.'
Interestingly, while Wesfarmers (WES) saw its share price bid lower in the opening hour of trade in response to this shake-up – the stock has since rebounded – by 1:03PM trading up 0.23%, to $38.97 per share.
The outlook in focus
Looking at an implementation time-line for all of this, the company expects to complete these actions over the next 12-months, with the majority of the changes occurring in CY21.
Overall, this shake-up forms part of the Group’s strategic re-positioning into a more digitally-focused business. To that end, it was noted that:
'In line with continued strong growth in online sales and the increasing number of customers who prefer to shop online, Kmart Group will continue its investment in digital channels. ‘
This will be achieved, the company said, 'Through an expanded click and collect offerings, the full range of Kmart, Target and Catch products will be available at all sores across the Kmart Group, including 'Kmart Hub' stores.’
Finally, Wesfarmers pointed out that it was still assessing its broader strategic options as it related to Target as well as the entire Group's store network. Further details on this assessment are expected to be provided to investors at the company's full-year results, set to be released in August.
Weighing on this announcement, and looking at the logistics of these moves, Goldman Sachs analysts said ‘To some extent, the next step is in the hands of landlords. The degree of store conversions to Kmart and outright store closures appear to be a function of landlord support. This will then play a role in WES’ remaining decisions around the Target brand.’
Goldman currently has a 12-month price target of $32.10 per share and a Neutral rating on WES.
Watch this space.
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