Kmart Group update and expected FY20 significant items

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    Kmart Group update
    • First phase of Target review has identified actions to accelerate the growth of Kmart and address
    the unsustainable financial performance of Target
    • Actions include the conversion of suitable Target stores to Kmart stores, the closure of a number of
    Target stores and a restructuring of the Target store support office
    • Redeployment opportunities in Kmart and other Wesfarmers businesses will minimise the effect of
    these changes on Target team members
    Significant items expected in the 2020 full-year results
    • 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 restructure of 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
    • 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
    • The estimates of the significant items remain subject to auditor review
    Wesfarmers provided an update on the review of Target, including changes to the Target and Kmart store
    networks. The Group also provided an update on significant items expected in the 2020 full-year results.
    Following the completion of the first phase of the Target review, Kmart Group has identified a number of
    actions to accelerate the growth of Kmart and address the unsustainable financial performance of Target.
    These actions include the conversion of suitable Target and Target Country stores to Kmart stores, the
    closure of between 10 to 25 large format Target stores, the closure of the remaining 50 small format Target
    Country stores, and a significant restructuring of the Target store support office. Wesfarmers is continuing
    its assessment of strategic options for a commercially viable Target and its remaining store network.
    Wesfarmers Managing Director Rob Scott said that these actions and further investment in Kmart will
    enhance the overall position of the Kmart Group, while also improving the commercial viability of Target.
    “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,” Mr Scott
    said.
    “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.
    Wesfarmers Limited page 2 of 4
    “The reduction in the Target store network will be complemented by increased investment in our digital
    capabilities, following the continued strong growth in online sales across the Kmart Group and the pleasing
    progress in Catch since its acquisition in August 2019. The expansion of our digital offer will provide
    customers with access to the Kmart and Target products they love, together with over two million products
    from the Catch marketplace, via home delivery or click and collect.
    “While accounting standards require us to recognise an impairment of assets within Target to implement
    the restructuring, these actions will allow us to enhance the overall value of Kmart Group and further
    strengthen Kmart.”
    Coinciding with the significant changes to the store networks in Kmart and Target, Kmart Group will
    complete the trial of Anko stores in Seattle, United States prior to the end of the financial year and close
    these operations. A number of the initiatives trialled are expected to be progressively implemented in Kmart
    stores.
    Following the deterioration in economic conditions since the first-half results, Wesfarmers has also
    assessed the carrying value of the Industrial and Safety division and expects to recognise a non-cash
    impairment, primarily relating to the impairment of goodwill.
    “In recent months we have seen improved execution and continued progress on the turnaround of
    Blackwoods,” Mr Scott said. “Despite this progress, the deterioration in economic conditions has resulted in
    lower customer demand in Workwear Group and GreenCap, and, along with uncertainty as to future
    economic conditions, has impacted our assessment of the carrying value of the overall Industrial and
    Safety division, requiring an impairment of goodwill.”
    Significant items expected in the 2020 full-year results
    As a result of the actions outlined above, along with the recent partial sale of its interest in Coles,
    Wesfarmers expects to recognise the following significant items in its 2020 full-year results:
    • 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
    The estimates of the significant items outlined above remain subject to auditor review. In the 2021 financial
    year, Kmart Group is also expected to incur one-off non-operating costs of approximately $120 to $140
    million relating to the conversion of stores and stock clearance activity prior to closure or conversion.
    Target review
    As announced in April 2020, Wesfarmers is conducting a strategic review of Target. Following the
    completion of the first phase of the review, the Kmart Group has identified the following actions to optimise
    the Target store network and reduce Target’s unsustainable cost base:
    • The conversion of between 10 to 40 large format stores to Kmart, subject to landlord support
    • The conversion of approximately 52 Target Country stores to small format Kmart stores
    • The closure of between 10 to 25 large format Target stores and the closure of the remaining 50
    Target Country stores which are not suitable for conversion to Kmart
    • A significant reduction in the size of the Target store support office
    • Ongoing negotiations with landlords to support the transition to a sustainable store network
    Wesfarmers Limited page 3 of 4
    These actions are expected to be implemented over the next twelve months with the majority occurring in
    calendar year 2021. The conversion of suitable stores to Kmart will address gaps in the Kmart network and
    is expected to result in an improved financial performance for the Kmart Group while meeting the Group’s
    return on capital hurdles.
    The conversion of suitable Target Country stores to small format ‘Kmart Hub’ stores will leverage Kmart
    Group’s learnings from trialling small format Anko stores in the United States while providing regional
    customers with increased access to a selected range of Kmart’s home, apparel and general merchandise
    products.
    In line with continued strong growth in online sales and the increasing number of customers who prefer to
    shop online, Kmart Group will continue its investment in its digital channels. Through an expanded click
    and collect offering, the full range of Kmart, Target and Catch products will be available at all stores across
    the Kmart Group, including ‘Kmart Hub’ stores.
    The Group is continuing its assessment of strategic options for a commercially viable Target and its
    remaining store network, including further optimisation of the store network and changes to the operating
    model. An update on this assessment will be provided at the Group’s full-year results in August 2020.
    Impact of network changes on Target team members
    Wesfarmers and the Kmart Group recognise that these actions will have a significant effect on a number of
    Target team members and are committed to supporting them through this process. All team members in
    Target stores scheduled for conversion to Kmart will receive an offer of employment from Kmart. Target
    team members affected by store closures will be given consideration for new roles created in Kmart and
    Catch as those businesses continue to grow. In addition, Wesfarmers has established a cross-divisional
    working group to identify redeployment opportunities for affected team members, including in Bunnings and
    Officeworks.
    With the majority of the proposed Target store closures planned to occur in the 2021 calendar year, this
    provides considerable time to explore all available options to redeploy affected team members. Target
    team members who are unable to be redeployed will be provided with access to support services, along
    with all entitlements.
    Kmart Group Managing Director Ian Bailey said that the decision to significantly reduce the Target store
    network was difficult but necessary.
    “Leveraging the strengths of the Kmart Group, we have made a significant effort to avoid store closures,
    retain our valued team members, keep serving our customers and supporting our suppliers. Unfortunately,
    the disruptive and competitive nature of the retail sector requires us to make some difficult decisions to
    ensure we have a viable Target business into the future, while continuing the strong growth of Kmart and
    Catch,” Mr Bailey said.
    “We continue to believe that Target has a future as a leading retail brand in Australia and is much loved by
    many customers, but a number of actions and changes are required to ensure it is fit for purpose in a
    competitive, challenging and dynamic market, including a smaller number of stores and a stronger online
    business.”
    Impact on credit rating and dividend policy
    The accounting impairments in Target and Industrial and Safety are non-cash in nature and will not impact
    the Group’s credit rating, debt facilities or the final dividend for the 2020 financial year.

    courtesy of Bell Direct
    =================================================================================
    ( DYOR )

    i hold WES

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