Nearly half of Target's 284 stores will either be closed or converted into Kmart stores over the next year, as Wesfarmers undertakes a massive restructure as well as $780 million of writedowns.
The struggling Australian retailer will now close its doors to 75 stores and covert a further 92 into Kmart stores as deteriorating conditions continue to weigh on Australia’s retail sector.
The department store chain's revenue and profits have taken a significant hit during the coronavirus lockdowns, leading to structural changes and disruptions which have left shopping centres deserted.
West Australian conglomerate Wesfarmers, which owns both Target and Kmart, said the move was necessary to reduce Target's unsustainable cost base while shifting focus to the more-profitable Kmart brand.
Last month, Wesfarmers announced it had accelerated a review of the Target brand, prompted by a sharp plunge in sales due to the pandemic.
Wesfarmers managing director Rob Scott told investors on Friday the changes would “enhance the overall position of the Kmart Group, while also improving the commercial viability of Target”.
Scott noted that Wesfarmers had been trying to fix-up Target for the past decade, but had fallen victim to emerging international specialty retailers and online retailers.
Wesfarmers said it would take costs and write downs totalling as much as $170 million this year, including the cost of shutting the Target stores.
It also flagged a non-cash impairment in Kmart of between $430 million to $480 million before tax, including an impairment of the Target brand name, property, plant and equipment, and the capitalised value of leases.
Scott said the group would transition staff into Kmart stores, and even consider placing Target employees into Bunnings and Officeworks if possible, but anticipated that about 1,300 jobs could be lost.
Wesfarmers said with the expectation to Target, its retail businesses remained “well-positioned” to respond to the changes in consumer behaviour and competition associated with this disruption.
“Wesfarmers planned closure of some Target stores and conversion of others to Kmart stores will not have a significant effect on its credit profile, with the majority of the restructuring costs being non-cash,” Moody’s Investors Service vice president Ian Chitterer said.
Options for remaining Target stores will now be assessed and an update provided to investors at Wesfarmers full-year results in August.
Wesfarmers also said it will recognise a $290 million gain on its sale of 10 per cent interest in Coles and one-off pre-tax gain of $221 million on revaluation of the remaining Coles investment.