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Wesfarmers share price lower after announcing major Target overhaul

The Wesfarmers Ltd (ASX: WES) share price looks set to end the week in the red following a big announcement.

At the time of writing the conglomerate’s shares are down 1% to $38.46.

What did Wesfarmers announce?

This morning Wesfarmers provided an update on its plans for the struggling Target business.

According to the release, the first phase of its Target review has identified actions to address the unsustainable financial performance of Target and accelerate the growth of its Kmart business.

These actions include converting suitable Target stores into Kmart stores, the closure of a number of Target stores, and the restructuring of the Target store support office.

The company plans to convert between 10 to 40 large format Target stores to Kmart stores and 52 Target Country stores to small format Kmart stores. It will then close between 10 to 25 large format Target stores and the 50 remaining Target Country stores.

These actions are expected to be implemented over the next 12 months, with the majority occurring in calendar year 2021.

In respect to the remaining store network, Wesfarmers is continuing its assessment of strategic options for a commercially viable Target.

Wesfarmers’ Managing Director, Rob Scott, believes the actions will result in a stronger Kmart business and enhance the overall position of the Kmart Group, which oversees both businesses.

He commented: “For some time now, the retail sector has seen significant structural change and disruption, and we expect this trend to continue. 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,” he added.

What now?

These actions will come with a cost. The restructuring costs and provisions in the Kmart Group are expected to be approximately $120 million to $170 million before tax in FY 2020. This reflects Target store closure costs, inventory write-offs, and a restructure of the Target store support office.

Non-cash impairment charges in the Kmart Group are expected to be higher at approximately $430 million to $480 million before tax. This includes an impairment of the Target brand name.

Outside this, Wesfarmers will also be making a non-cash impairment in the Industrial and Safety division of approximately $300 million before tax. This relates primarily to the impairment of goodwill.

Some of this will be offset with a pre-tax gain on sale of its 10.1% interest in Coles Group Ltd (ASX: COL) of $290 million. It will also recognise a one-off pre-tax gain of $221 million on the revaluation of its remaining Coles investment.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.