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Wesfarmers Ltd Massive Restructuring Of Target Business

Timothy Anderson

Timothy Anderson is a contributor with the Australian Stock Report and is currently in his final year of studying a Bachelor of Applied Economics and a Bachelor of International Relations and Politics at the University of Canberra. Tim has a genuine passion for economics, specifically in macroeconomic analysis including how certain macroeconomic policies and indicators affect financial markets and the economy, as well as how these factors affect personal investment strategies. Tim currently holds RG146 Tier 1 Generic Knowledge qualifications.

Wesfarmers Ltd (ASX: WES) is an Australian conglomerate. Wesfarmers has interests in Australian and New Zealand that cover businesses such as, home improvements and outdoor living, apparel and general merchandise, office supplies and in the industrial sector with businesses in chemicals, energy and fertiliser lithium and industrial safety products. Wesfarmers has a market capitalisation of A$44 billion.



What has Wesfarmers announced today?

Wesfarmers announced several new business strategies today that was formed from the review of Target. Wesfarmers will be converting suitable Target and Target Country stores to Kmart stores. This includes converting between 10 to 40 large format Target stores to Kmart stores and converting around 52 Target country stores to small format Kmart stores. Wesfarmers will be closing between 10 to 25 large format Target stores and the remaining 50 small format Target Country stores. Wesfarmers will also be restructuring the Target store support office.

These changes have been made on the basis that Target has been financially underperforming and Target cannot respond to significant change and disruption in the retail sector. Regarding the workforce, employees at Target stores which are either closing or being converted are likely to receive employment options to work at the new Kmart stores. However, this may not be an option to all Target employees, resulting in some job losses.

What are the significant items expected in the FY20 full year results?

The restructuring costs and provisions in Kmart Group of approximately $120 to $170 million before tax, primarily reflecting Target store closure costs, inventory write-offs and a reduction in the Target store support office. Non-cash impairment in Kmart Group of approximately $430 to $480 million before tax, including an impairment of the Target brand name, property, plant and equipment, the capitalised value of leases and other assets. Non-cash impairment in the Industrial and Safety division of approximately $300 million before tax, primarily relating to the impairment of goodwill. 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.

Wesfarmers management notes that these actions will not impact the Group’s credit rating, debt facilities or the final dividend for the 2020 financial year.

What is the outlook for Wesfarmers?

This recent announcement of closing and converting several Target stores could allow for a stronger financial performance moving forward. However, investors will not know the financial effect of these closures and conversions for some time.

What is the market reaction?

The market reaction to Wesfarmers announcement today is slightly positive. Wesfarmers share price is up around 0.2% and is currently trading at A$38.39. The main reason why this is a slightly positive result is that the Australian market is down around 0.5% today. Wesfarmers has a forward P/E ratio in the low twenties and an annual dividend yield of around 4.1%.



This article has been prepared by the Australian Stock Report Pty Ltd (AFSL: 301 682. ABN: 94 106 863 978)
(“ASR”). ASR is part of Amalgamated Australian Investment Group Limited (AAIG) (ABN: 81 140 208 288 Level 13, 130 Pitt Street, Sydney NSW 2000).
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