Coles sales up, Target struggles

SPECULATION that Wesfarmers could merge its troubled Target with the booming Kmart have been described as a “recipe for disaster”.

People shopping at Target at the Myer Centre in the Queen Street Mall for Jean Paul Gaultier. Pic Peter Wallis

SPECULATION that Wesfarmers could merge its troubled Target with the booming Kmart have been described as a “recipe for disaster”.

Fairfax this morning reported rumours that a ‘Karget’ merger was being considered in order for Wesfarmers to avoid having to write down its struggling department store chain by as much as $800 million.

Kmart boss Guy Russo was recently handed control of Wesfarmers’ department store division, adding the scandal-plagued Target to his remit.

Geoff Dart, retail analyst with DGC Advisory, said any merger would be borne out of “desperation” and was a “recipe for disaster”.

“One plus one will equal 1.5,” he said. “Kmart is cheap and cheerful, same as Bunnings. They absolutely own that space with great marketing, great positioning.

“When you bring in a business that’s confused, consumers get confused. Kmart is a fantastic business, so why would you saddle it with all the problems of Target?”

Mr Dart said Wesfarmers would be better advised to sell off the business entirely while keeping some strategic sites. The estimated $2 billion could be reinvested into Bunnings and Coles.

“If you have a problem child you can either send it off for a lot of therapy, or divest yourself of it. I would just write it off, as Woolworths have had to do with Masters,” he said.

“Bunnings is firing up, expanding overseas, they need to invest in it. There’s a lot they can do with Coles, like getting into the $30 billion food service business.”

Speaking to media on Thursday, Wesfarmers boss Richard Goyder hosed down talk of a merger, but admitted some Target stores would be converted to Kmarts over the next five years.

“I think some of the speculation [of a merger] over the last two days is way beyond what our thinking is and way beyond where we’re heading at the moment,” Mr Goyder said.

A Coles supermarket in Sydney. Picture: Paul Miller/AAP

“In the short term Guy’s focus will be on getting Target right. There will be some things Guy wants to move on and change and rethink. That will have a short-term impact on the business as we set it up for the longer term.”

He described talk of merging balance sheets to avoid taking a writedown as “just a complete non-issue to be honest”. “This is just an arbitrary allocation between businesses, it’s not cash and frankly I don’t think it’s here nor there,” he said.

It comes as Wesfarmers this morning announced its most recent sales figures.

A record number of transactions over the Easter period have boosted Coles third-quarter results, but sales at Target have declined.

Wesfarmers says food and liquor sales for the three months to March 31 rose by 5.9 per cent to $7.518 billion, from $7.097 billion for the prior corresponding period, while total Coles sales improved 3.2 per cent.

Sales at Target improved 2.3 per cent to $678 million, but Wesfarmers says that was only due to an early Easter and that adjusted comparable store sales dipped 0.8 per cent.

Mr Russo said the weaker result was driven largely by lower sales in womenswear and underwear, with homewares sales also down.

“Following the recent creation of the Department Stores division, a strategic review of the business by new management is presently underway,” he said.

“Ahead of this work being completed, Target’s results for the fourth quarter are expected to include the effects of a number of initiatives aimed at establishing a stronger platform for the longer-term business turnaround.”

Coles managing director John Durkan said the supermarket had continued to drop prices on key basket items including roast chicken, Colgate toothpaste and Kleenex tissues.

“This ongoing commitment to customers has delivered continued sales growth through the quarter and culminated in more customers shopping with us over the Easter period,” he said.

Mr Goyder said department store sales growth increased by 11.4 per cent, with strong sales growth in Kmart, which made $1.11 billion, “more than offsetting difficult trading in Target”.

“Kmart delivered another very good quarter with sales increasing by 17.9 per cent on last year, and growth recorded in all categories,” Mr Goyder said.

“While Target’s sales increased by 2.3 per cent on last year, trading momentum weakened during the quarter, with margins significantly affected by high levels of clearance activity late in the period.”

Bunnings sales were up 11 per cent to $2.594 billion, while Officeworks sales were up 5.6 per cent to $485 million.

— with AAP