Up to 167 Target stores will be either closed or converted into Kmarts following a strategic review from owner Wesfarmers (ASX: WES) into the struggling retail chain.
The restructuring will cost $120-170 million for the Kmart Group division, in addition to a non-cash impairment of $430-480 million before tax in relation to the Target brand name, property, plant and equipment, the capitalised value of leases and other assets.
Wesfarmers will significantly reduce the size of its Target support office with between 10 and 25 large format stores to close, along with 50 Target Country stores that are not suitable for conversion.
The group expects between 10 to 40 large format stores wil be converted to Kmarts, subject to landlord support, along with the conversion of approximately 52 Target Country stores to small format Kmart stores.
In its last annual report, Wesfarmers stated there were 289 Target stores around the country, meaning the upper end of store cuts and conversions signalled would lead to a 58 per cent reduction.
The conversion of suitable Target Country stores to small format 'Kmart Hub' stores will leverage learnings from trialling small format Anko stores in the US, while providing regional customers with increased access to a selected home, apparel and general merchandise range.
This dramatic shift is set to take place over the next 12 months with the majority occurring in calendar year 2021. All team members in stores to be converted will be given job offers from Kmart, while staff in stores due to be shut down will be given consideration for new roles created in Kmart and Catch as those businesses continue to grow.
In addition, Wesfarmers has established a cross-divisional working group to identify redeployment opportunities for affected team members, including in Bunnings and Officeworks.
Wesfarmers managing director Rob Scott says these actions and further investment in Kmart will enhance the overall position of the Kmart Group, while also improving the commercial viability of Target.
"For some time now, the retail sector has seen significant structural change and disruption, and we expect this trend to continue," says 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."
Kmart investments will be focused on digital channels. Through an expanded click and collect offering, the full range of Kmart, Target and Catch products will be available at all stores across the Kmart Group, including 'Kmart Hub' stores.
"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," says Scott.
"The expansion of our digital offer will provide customers with access to the Kmart and Target products they love, together with over two million products from the Catch marketplace, via home delivery or click and collect."
Kmart Group managing director Ian Bailey describes the decision to significantly reduce the Target store network as difficult but necessary.
"Leveraging the strengths of the Kmart Group, we have made a significant effort to avoid store closures, retain our valued team members, keep serving our customers and supporting our suppliers," Bailey says.
"Unfortunately, the disruptive and competitive nature of the retail sector requires us to make some difficult decisions to ensure we have a viable Target business into the future, while continuing the strong growth of Kmart and Catch.
"We continue to believe that Target has a future as a leading retail brand in Australia and is much loved by many customers, but a number of actions and changes are required to ensure it is fit for purpose in a competitive, challenging and dynamic market, including a smaller number of stores and a stronger online business."
For FY20 Wesfarmers has also flagged a non-cash impairment of $300 million before tax for its industrial and safety division, as well as a pre-tax gain on sale of 10.1 per cent interest in Coles of $290 million, and one-off pre-tax gain of $221 million on the revaluation of the remaining Coles investment.
Business News Australia