Target misses the mark for Wesfarmers
Target’s attempted brand overhaul, led by UK fashion celebrity Gok Wan, has missed its mark as the retailer’s earnings continue to shrink.
Retail giant Wesfarmers has slashed the value of its Target brand by $680 million, and is bracing for a 40 per cent fall in the chain store’s annual earnings.
The massive downgrade of Target’s accounting value will eat into Wesfarmers’ bottom line for 2013/14, along with a $94 million bill for the restructure of its liquor business.
However the charges will be offset by a $1 billion profit on the recent sale of Wesfarmers’ insurance underwriting operations, resulting in a gain of between $261 million and $301 million for the financial year.
Target has been struggling for some time, with sales having fallen every year since 2010, and earnings having plunged by as much as 78 per cent in that time.
“I think this is a recognition of reality that the market doesn’t value Target as highly as Wesfarmers had reflected in its carrying value,” CMC Markets strategist Michael McCarthy said.
“Brand value often builds as marketing efforts go through, so given the big push they’ve had on the `Tar-jay’ ads with Gok, I suspect that this is a cleaning up of the books and a recognition of reality.”
Wesfarmers confirmed the ad campaign has so far failed to boost Target’s earnings, which are expected to be between $82 million and $88 million for 2013/14, down from $136 million in the previous year.
Wesfarmers shares rose despite the bad news on Target, as cutting its value was likely seen by investors as a necessary accounting move, Mr McCarthy said.
The shares gained $1.14, or 2.75 per cent, to $42.66.
Reducing Target’s book value may also be part of preparations for a sale of the business, most likely to private equity, although Wesfarmers says it is committed to turning around the brand.
“We are pleased with the progress that has been made over the last 12 months in materially strengthening Target’s leadership team and we consider there to be many opportunities to significantly improve Target’s performance,” managing director Richard Goyder said in a statement.
Wesfarmers’ $94 million hit to its liquor businesses – Liquorland, Vintage Cellars and First Choice – stems from an overhaul of the stores planned for 2014/15.
The company has previously admitted its bottle shops are cluttered and confusing, and its staff undertrained.
It wants to improve its liquor sales, as Dan Murphy’s and BWS – owned by rival Woolworths – have achieved stronger growth.