The company first flagged the review at its full-year results last August, and today told investors Target’s “unsatisfactory financial performance” would be swiftly addressed to make the company commercially viable.
Following a restructure, Wesfarmers could look to sell or spin-off the business as it did with supermarket Coles, though Mr Scott did not indicate his preference, saying “all options are on the table”.
Wesfarmers shares rose as much as 1.3 per cent following the news before closing 0.3 per cent higher at $37.73.
Target has been a longstanding issue for Wesfarmers, dragging on the company’s otherwise solid earnings and faring far worse than Kmart as it battled fierce competition from mid-market entrants such as Uniqlo.
Online would play a much bigger role at Target following the review, Mr Scott confirmed, as he noted Wesfarmers would need to take a knife to a number of the chain’s 290 large-format stores to ensure the company’s viability.
Some discussions are already underway with landlords over stores where sales had declined dramatically. “We don’t see those sites being commercially viable over time,” Mr Scott said.
Analysts believe the flagged drop in earnings would make it more rational for Wesfarmers to close a higher number of Target stores, though Credit Suisse analyst Grant Saligari said Wesfarmers could not “close its way to success”.
“Target has too many stores to go down that route,” he said. “Changing the distribution strategy to go more online would enable it to create value out of the brand and the product position it has.”
Analysts at investment bank Citi were more pessimistic, saying a full exit of Target is the most likely outcome of the review, though a much smaller network of Target stores could also be on the cards.
Citi values the chain at “close to zero” due to the ongoing losses and noted a closure of the whole Target network could cost as much of $1 billion due to lease-break costs, with an additional brand value writedown of $500 million.
“Given the capital that would be required to sustainably turn Target around and a $1.6 billion lease liability, we view a closure as most likely,” the company said.
Mr Scott showed support on Tuesday for retailers that have been fighting landlords for a redesign of retail leases, saying proprietors should consider agreements based on a percentage of a tenant’s sales or “pandemic clauses” which facilitate for unprecedented events such as the coronavirus.
“The coronavirus crisis has highlighted normal lease arrangements simply don’t accommodate a downturn like this. There isn’t fair risk sharing under traditional lease agreements,” he said.
Wesfarmers’ other businesses, Bunnings and Officeworks, have continued to perform throughout the third quarter and into the fourth. Sales have continued to grow in line with the first half of the financial year: 5.3 per cent at Bunnings and 11.9 per cent at Officeworks.
Having recently pocketed a $2.1 billion windfall from the sale of a 10 per cent Coles stake, Wesfarmers said it remained well-positioned to weather any long-term effects of the coronavirus crisis.
The company has also extended its debt facilities by $2 billion to a total of $5.3 billion, which Mr Scott indicated would allow Wesfarmers to pursue any potential investment opportunities.
However, Mr Scott remained tight-lipped on whether the collapsed Virgin Airlines could be one of those opportunities, saying the company would not comment on potential acquisitions or investments.
Dominic Powell writes about the retail industry for the Sydney Morning Herald and The Age.