Wesfarmers chief executive Rob Scott says international chains such as H&M and Zara have made it increasingly difficult to run a profitable department store, prompting his decision to shut or convert 167 Target shops across the country.
The $44 billion ASX-listed conglomerate announced on Friday it would shut up to 75 Target stores and convert another 92 to the Kmart chain as part of a major restructure of its discount department store operations. Wesfarmers said the move was necessary to reduce Target's unsustainable cost base.
Wesfarmers will close or convert up to 167 Target stores.Credit: Justin McManus
Mr Scott told The Age and The Sydney Morning Herald growing pressure from international retailers was one reason for Target's woes, saying businesses such as Zara, Uniqlo, H&M and Amazon had affected the chain's viability. "They have fundamentally changed the competitive environment, particularly as it relates to department stores," he said.
"We have made every effort within Wesfarmers to find a sustainable path forward for Target," Mr Scott said. "But unfortunately, we're fighting against a number of forces at play that makes it impossible to continue to run a Target business of the same size that we had 10 years ago."
Target has consistently underperformed in Wesfarmers' portfolio, posting diminishing sales figures and weak profits as the brand has struggled to differentiate itself from stablemate Kmart. In late April, Wesfarmers announced it had accelerated a review of the chain, prompted by a sharp plunge in sales due to the coronavirus pandemic.
"We've got too much [retail] space allocated to the department stores and there are now many different channels from which customers can buy brands, not just in-store but also online," Mr Scott said.
Converting and closing the stores will cost Wesfarmers $790 million in costs and impairments across the current and next financial year. Some of these expenses will be offset by a $511 million gain on the company's investment in Coles.
Mr Scott said efforts would now be focused on increasing both Target's and Kmart's digital offerings, a move accelerated by the continuing structural change and disruption in Australia's retail sector.
Between 10 and 40 large format Target stores will be converted to Kmarts, subject to landlord support. An additional 52 Target Country stores, which are primarily located in regional areas, will also be converted to small-format Kmart stores.Credit: The Sydney Morning Herald
The company expects between 1000 and 1300 jobs could be affected by the closures, though efforts will be made to find workers' roles in other Wesfarmers businesses.
Wesfarmers shares stayed flat at $38.86 following the announcement, largely because investors had expected this news, JP Morgan analyst Shaun Cousins said.
"No one thought Target was a great business," he said. "It was not a strong performing business financially, and what we've had today is the book value adjustments and some fairly hard-headed but required decisions on store numbers."
Jim Power, an analyst at Wesfarmers shareholder Martin Currie, said the move had set the company up for future success. "Making it all simpler, more efficient, more competitive, was vital because the world is getting tougher," Mr Power said. However, Wesfarmers will need to acquire some big-hitting businesses to make up for the loss of Target, Mr Power said.
"Wesfarmers needs to add value by doing some big mergers and acquisitions in an area that's attractive to them and they can move the needle in," he said.
"That's their model and they do it well, and this market is a wonderful environment for that."
Between 10 and 40 large-format Target stores will be converted to Kmarts, subject to landlord support. An additional 52 Target Country stores, which are primarily located in regional areas, will also be converted to small-format Kmart stores.
The remaining 50 Target Country locations will shut and a further 10 to 25 large-format Target stores will also close. Between 122 and 167 stores, or about half of Target's 284-strong network, will either be converted or shut. A handful will be converted into small-format Officeworks or Bunnings stores.
Options for the 100-odd remaining Target stores will be assessed and an update provided to investors at Wesfarmers' full-year results in August, with the company saying it is looking at further store closures and a change to Target's operating model.