Wesfarmers takes $1.3b hit on Bunnings UK and Target

bunnings-uki-st-albansRetail conglomerate Westfarmers is taking a $1.3 billion hit in writedowns and impairments against its underperforming Bunnings United Kingdom and Ireland (BUKI) and Target department stores.

Wesfarmers said its UK unit – acquired for $705 million in February 2016 – will be subject to a non-cash impairment of $795 million, a $66 million writedown in the value of excess and unsuitable stock, a $70 million increase in store closure provisions, and a $92 million tax asset writedown,

The remaining $306 million non-cash impairment is related to discount department chain Target.

BUKI is expected to report an underlying loss before interest and tax of $165million for HY2018, reflecting the poor trading performance of Homebase.

“We need to address underperformance in our portfolio that is detracting from positive performance in other areas, and the announcement today sets out decisive actions to achieve this,” said Wesfarmers managing director Rob Scott.

“The Homebase acquisition has been below our expectations which is obviously disappointing. In light of this, a review of BUKI has commenced to identify the actions required to improve shareholder returns.”

Target’s impairment will be applied against the carrying value of its brand name($238million), remaining goodwill of $47million and property and equipment($21million), which Scott said reflected difficult trading conditions in an increasingly competitive market.

“Target’s earnings have stabilised and the business will continue to leverage the Department Stores structure to support its future performance,” he said.

Senior IBISWorld Analyst, Nathan Cloutman’s said the 2016 acquisition of Homebase has significantly affected Wesfarmers’ finances and that the UK-based hardware chain, which Wesfarmers is slowly turning into the Bunnings brand, has performed poorly since the takeover.

“The UK Hardware & Home Improvement Stores industry, which is worth £12.3 billion, is performing poorly, on the back of increased economic uncertainty and weak consumer spending on houses and refurbishments following the EU referendum,” Cloutman told Inside Retail.

“Wesfarmers is looking at ways to boost the profitability of its UK-based hardware business, although this will be hard while uneconomic uncertainty remains in the UK.”

Leadership changes

Wesfarmers said its review of BUKI is focused on improving the Homebase brand and “evaluating the performance” of pilot stores to inform future plans.

“We will take a disciplined approach to further capital deployment in BUKI and provide an update onthe outcomes of the business review and our plans for a broader conversion to Bunnings at our strategy briefing day in June,” said Scott

Meanwhile after a 25 year career with Bunnings, most recently as managing director of BUKI, Peter J Davis has announced his retirement from the business.

BUKI will now be led by Damian McGloughlin, who has been appointed managing director of BUKI, reporting to Bunnings Group managing director Michael Schneider.

David Haydon has also been appointed chief operating officer to “provide additional local experience and expertise.”

“It is clear that a significant amount of change has been driven through Homebase since the acquisition and the disruption caused by the rapid repositioning of the business has contributed togreater than expected losses across the Homebase network,” said Schneider.

“Sales have been affected as non-core categories and concessions were exited ahead of the implementation of the Bunnings format, and investments in price and new ranges have not offset these lost sales. Trading was particularly weak during the latter part of the first half of the 2018financial year.

“Our focus is on improving the profitability of Homebase through improved ranging and execution in-stores, while continuing to develop plans for a broader conversion to Bunnings. T

There are 19 pilot stores currently trading, which Wesfarmers said will inform the future offer and roll-out process.

“Through the pilot program, we have identified ways to reduce the capital expenditure and duration of the conversions,” said Schneider.

“As a result, we are reviewing plans for the roll-out of Bunnings across the network, which will include a small store format in addition to the warehouse format.

“We will continue to monitor the profitability of the first tranche of pilot stores over the remainder of the2018 financial year. Achieving proof of concept for the Bunnings format is a precursor to executing abroader roll-out plan.”

Target ‘improving’

Wesfarmers said its department stores division – comprising Kmart and Target – had achieved earnings of approximately $415 million for the first half of the 2018 financial year, representing the highest level of combined Kmart and Target first-half earnings since the 2010 financial year.

The conglomerate said Target had “progressed its strategic plan, significantly reducing its cost base and inventory levels, improving merchandise disciplines and increasing the level of direct sourcing,” helping to stabilise its earnings base.

“Target has made good progress to improve its financial performance and the impairment follows the continuation of difficult trading conditions in an increasingly competitive market,” said Scott.

Despite a decline in sales in HY2018, Target is expected to report earnings before interest and tax of $33million for the half, representing an improvement of 13.8 per cent on underlying earnings of $29million in the prior corresponding period.

“Target’s revenue has suffered over the past five years due to increased competition and subdued discretionary spending,” said Cloutman.

“In response to volatile consumer sentiment and weak demand, Target has increased its offering of low- to mid-range products.

“However, this market positioning has led to Target being in direct competition with Wesfarmers’ other department store, Kmart. Consequently, Kmart has achieved solid growth while demand for Target has dwindled. The arrival of Amazon into Australia is also expected to put pressure on Target over the next five years.”

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