Wesfarmers to trim Target portfolio

TargetWesfarmers will reduce the size of Target’s store portfolio in an effort to improve productivity as it looks to refocus the struggling business towards a growth phase by FY21.

Speaking to analysts and investors at Wesfarmers’ annual strategy day on Wednesday, department stores chief financial officer Marina Joanou said that leadership has taken “decisive action” to cut costs at Target and reset the business, concluding a store network review across the division.

“We’ve reviewed the whole country and have created a plan that rebalances the network, removes unproductive space and opens accretive new space over time,” she said.

A 20 per cent improvement in store space productivity across the department store division is being targeted in what Joanou called a “long term game” that will include closures, store re-badges and new stores where appropriate.

Wesfarmers department store CEO Guy Russo, who has been tasked with spearheading the turnaround of Target, declined to outline the number of Target stores earmarked for closure, but told a Sydney audience that the plan involves large and small format stores.

“Our capital plans will be prioritised on the basis of performance, materiality and opportunities for market catch-up,” Russo said.

“Our network over time will see net space fall, but sales and earning productivity increase as we seek to optimise the fleet.”

Flagging regional outlets as closure opportunities, Russo explained that the department store division’s new plan has prioritised the capacity for long term returns.

Analysts have warned that discount department store space has been saturated for some time, but that onerous lease obligations remain a key challenge for substantially reducing store space.

Wesfarmers group finance director Terry Bowen said that the group is making progress in reducing its average lease length, aiming to keep the metric under 10 years. Joanou later explained that Wesfarmers is leveraging the size of its current store network to negotiate the best occupancy costs with landlords and is seeking to drive a tough bargain that mitigates risk.

Target is now trialling a new store format, with range and space trials that look to simplify the business into one store model that focuses on space profitability.

“When we’ve developed and proved an economically successful format we will roll-out our renewal,” Russo said.

Russo doubles down, Amazon is a “stimulus”

Suggestions have been raised by analysts that Wesfarmers should sell Target or merge it into the Kmart brand given the continued poor performance of the business, which saw third quarter sales drop 18.1 per cent.

But Russo has repeatedly rejected the notion that the business is beyond saving, telling shareholders that there was once scepticism about his ability to orchestrate a turnaround of Kmart, which saw third quarter sales increase by 2.5 per cent to $1.1 billion.

However, concern was raised over the timeline for the turnaround, which could run past FY21.

Russo said that Target is currently in the “fix” phase of a three-stage turnaround, which is projected to run from FY17-19 before a “reset” phase across FY19-20 and then finally a growth phase by FY21.

Nevertheless, Russo doubled down on his belief that there’s room for Target to occupy a fashion and value conscious position in the market that’s distinct to Kmart.

“We have a way to go through fashion to reclaim the credentials that Target was famous for,” he said. “We’ll provide that at the lowest price we can, but it won’t be the lowest price in the market – that’s Kmart’s space.”

Russo hopes to take on specialty retailers, but the lower-middle part of the market has become increasingly competitive in recent years with the entry of international competitors and will soon become even more crowded as Amazon prepares to touch down.

Speaking to a recent Morgan Stanley report that Wesfarmers earnings could take a $400 million hit from the entry of Amazon by 2026, Russo said that they’ll undoubtedly take share, but there will be a “bucketload” left.

“I don’t look at Amazon, I look at the market, it’s $80 billion dollars,” he said. “[Analyst] forecasts went to 2026, so as far as who’s right or wrong let’s just write it in our diaries and see who was right when we wake up on the day.”

“It feels like Armageddon is coming the way we talk about Amazon,” Russo continued.

“It puts pressure on us to make sure we are really servicing the customers need […] Amazon is a stimulus on us.”

Turnaround continues

The impending arrival of Amazon isn’t slowing down Russo’s turnaround plans, in the last twelve months the leadership team has been overhauling several key aspects of the business, increasing EDLP, direct sourcing and reducing SKUs.

The business currently has around 70,000 active SKUs and is targeting 50,000, but Russo flagged that the final reductions will take considerably longer given their role in propping up sales.

Direct sourcing is up 11 per cent on a year ago and the business has returned to TV advertising as part of a new marketing plan that will see the business focus on evolving its marketing mix.

Product range is also evolving, Russo said that the team is currently “studying strengths of competitors and then from that shamelessly stealing [ideas].”

“The piece that will take time is getting the design, fashion and quality right,” he said. “I can’t just switch on a light switch and get it right in a year.”

 

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