Wesfarmers sets a big gun on stationary Target

The conglomerate's decision to shift one of its star executives over to Target suggests chief Richard Goyder is concerned about the store's post-crisis turnaround.

It’s interesting that Wesfarmers’ announcement of a change of leadership at its struggling retail brand, Target, appeared to have no impact on the sharemarket given that it appears to betray some concerns within the group about the lack of progress in turning the discount department store group’s fortunes around.

Dene Rogers, who replaced former Target managing director Launa Inman only 18 months ago, has left the group after deciding ‘’for personal reasons to leave Target to pursue other opportunities’’, and has in turn been replaced by Coles’ stores development and operations manager, Stuart Machin.

Machin is one of the key executives recruited to Coles as part of the core turnaround team Wesfarmers put together in 2008 and which has presided over the remarkably successful (and continuing) re-engineering of the supermarket business. He had previously held roles at Sainsbury's, Tesco and ASDA Walmart in the UK.

In February Target announced a 20.4 per cent decline in earnings before interest and tax for the half-year to December 31, with Wesfarmers saying that there had been a positive customer response to Target’s transformation initiatives but that earnings had been affected by the high level of costs associated with them. Wesfarmers’ chief executive Richard Goyder was cautiously optimistic that the turnaround was occurring.

The decision to shift Machin from the Coles team to head up Target would suggest that Goyder’s patience with the pace and/or nature of the turnaround is wearing a little thin.

There is still considerable upside in the renovation of Coles and Wesfarmers would be anxious not to jeopardise the progress still being made in food and liquor, which suggests there is some perceived urgency in addressing Target’s decline.

Target was once regarded as the best discount department store business in the country. As recently as the December half of 2009 it was generating earnings before interest and tax of $279 million and an EBIT-to-sales margin of 12.8 per cent. Its return on capital was an annualised 12.6 per cent.

In the most recent half its EBIT was $148 million, its EBIT margin was 7.1 per cent and its return on capital was also 7.1 per cent.

Discount department stores have been the segment of retailing that has been hardest hit by the generally weak retail environment of the past few years. It hasn’t helped Target (or Woolworths’ Big W for that matter) that the sector has also been affected by the radical and very successful strategy adopted by Guy Russo at Target’s Wesfarmers sibling brand, Kmart.

Russo, by dramatically narrowing the range of goods Kmart stocks, has been able to deeply discount core items and drive volume growth and scale efficiencies.

That has had a very disruptive impact on other retailers and their suppliers – and, one would assume, on Target – but has also completely turned around Kmart’s status from that of a failing brand to one with EBIT of $246 million in the December half, an EBIT margin of 10.7 per cent and a return on capital of 22.5 per cent. Kmart has been a surprising success story of even more surprising magnitude.

With a sales base approaching $4 billion a year there is considerable upside in Target and not quite the same imperative to completely reinvent its offer as there was when Wesfarmers acquired a Kmart which had no earnings and no clear market position or in-store proposition.

For Target, which is still solidly profitable and which still enjoys reasonable margins (albeit not the stellar margins it once generated) the issue appears to be one of detail and execution, both in-store and in the supply chain, rather than re-invention – although its offer does have to take into account the impact the revitalised Kmart has had on its segment of the market as well as the growth of competitive online alternatives.