Wesfarmers fine-tunes the future
Russo will leave Wesfarmers on a high note, after posting a thumping 21.5 per cent increase to $660 million in earnings before interest and tax (EBIT) for the department stores division.
However, he leaves some significant unfinished business, with a turnaround in the fortunes of the Target discount department store chain far from certain of success.
Russo’s departure is another piece of the recast of Wesfarmers’ retail portfolio by CEO Rob Scott, following the departure of Bunnings MD John Gillam and the pending departure of Coles food and liquor group MD John Durkan.
Scott’s biggest moves in the reshaping of the company’s retail portfolio have been the costly retreat from the UK, with the divestment of the Bunnings-Homebase home improvement venture, and the decision to demerge the Coles food and liquor division.
He has also sold off the Kmart Tyre and Auto to Continental AG for $350 million, subject to regulatory approvals.
The Kmart Tyre and Auto chain is one of Australia’s largest retailers in the category, with 258 stores across Australia, and has been on the sale block for some months.
Wesfarmers has also considered a public float of its category killer Officeworks chain, a move that was previously shelved because the company did not believe it would realise the value it wanted for the business, which has annual sales of more than $2.1 billion and EBIT of $156 million.
It is expected the public float or a trade sale of Officeworks will be revisited by Wesfarmers next year after it has completed the stock exchange listing for the Coles food and liquor business in November of this year.
Officeworks is certainly primed for a sale, with sales growth in the 2018 financial year of 9.1 per cent and an increase in EBIT of 8.3 per cent.
Bullish on Bunnings
Scott’s recast of the retail portfolio leaves Wesfarmers with the department store division and the Bunnings Warehouse powerhouse. Bunnings boasts the scale that the conglomerate wants to incorporate in its business portfolio, and it is less threatened by competition than the food and drink division that is being demerged.
Bunnings’ Australian and New Zealand business now has $12.5 billion in annual sales, and generates EBIT of $1.5 billion.
While Bunnings Warehouse looks like a keeper, at least in the short term until Scott can find an alternative investment with a strong revenue and earnings profile, the department stores business looks much less secure in a Wesfarmers retail portfolio going forward.
That factor may well be one reason that Russo has opted to retire from his role as CEO of the department stores division, allowing new management to continue the repair work on the Target chain with a view to Wesfarmers divesting the Kmart and Target chains.
Wesfarmers has effectively appointed Ian Bailey, MD of Kmart, to the role Russo had in leading both of the discount chain brands from November when the company will hold its annual shareholders meeting and finalise the Coles food and liquor listing.
In an interesting consequential move, Wesfarmers has appointed Marina Joanou, the CFO of its department stores division, as MD of the struggling Target chain.
For the remainder of FY19, both Bailey and Joanou will be able to draw on Russo’s 10 years experience as MD of the Kmart chain, driving its turnaround, particularly over a six-year period to around 2013 when the business started to show substantial improvement.
Russo revamped Kmart, cutting inventory, changing marketing and store layouts and pursuing an everyday low prices strategy that took time to gain traction but ultimately succeeded to the detriment of the rival discount chains, Target and Big W – and arguably Myer.
Russo assumed responsibility for the beleaguered Target chain in the 2016 financial year after a succession of MDs had failed to successfully execute transformation strategies.
Scott has credited Russo with a fivefold increase in profitability at Kmart and a “significant reset of Target”, reducing its cost base and returning it to profitability.
For FY18, Wesfarmers department stores division increased earnings by 21.5 per cent to $660 million, representing record earnings for the two chains but effectively due to Kmart’s performance.
Kmart revenues increased by 8 per cent for the year, with comparable store sales growth of a healthy 5.4 per cent.
Target improved its performance in FY19 but still shed a further 4.7 per cent of sales despite closing six under-performing stores and opening six new ones.
Sales for the two chains combined were 3.6 per cent up on the 2017 result with revenues of $8.84 billion, indicating a market share gain for Kmart against a further deterioration in Target’s customer base despite the turnaround plan under way.
More telling is the fact that Target’s comparable store sales fell by a further 5.1 per cent for the full financial year.
Wesfarmers claims the mix of sales at Target improved earnings but a return to profitability for the chain would owe much to reduced business costs from the back-of-store operations rather than trading gains.
“Kmart invested significantly in the customer offer during the year, delivering greater value and enhanced product.
Kmart achieved double-digit growth in customer transactions and units sold, with earnings growth also driven by ongoing productivity initiatives and investments in the store network in FY19, according to Scott.
Target’s balancing act
Wesfarmers remains positive about Target’s progress, reporting that online, menswear and homewares categories all delivered sales growth.
Wesfarmers claims its department stores division is “well positioned” for the future in what it describes as a highly competitive market.
The problem for Wesfarmers is to turn around the performance of the Target chain without impacting on Kmart’s performance and without losing ground to an improving Woolworths Big W chain.
While it might not have been a massive leap forward for Big W, the Woolworths discount department store chain posted its first positive comparable sales growth in nine years for FY18.
Big W lifted increased annual sales by a slender 0.7 per cent to $3.6 billion for the year, with like-for- like sales increasing by 0.9 per cent.
Big W has lowered prices, improved product ranges, changed the store experience and enhanced its digital offer as part of its turnaround strategy.
The initiatives have stabilised the business but have not dented Kmart and taken little market share from Target, but it has posted a sales increase and lifted its gross profit.
Woolworths Group CEO Brad Banducci said FY18 was a year of stabilisation for Big W, with progress made on the turnaround plan, but he conceded there was still a long way to go.
“Big W has started the journey to being a purpose-led organisation, and the team and customers continue to be the primary focus.
“For the year ahead, Big W will continue to invest in price to regain customer trust, reset ranges in-store, improve the convenience of the in-store and digital experience and improve stock availability,” Banducci said.
However, like Target, Big W has been steamrolled by Kmart.
The question for the strugglers is whether or not Russo’s departure takes the wind out of Kmart’s sails and gives them space to manoeuvre and regain sales and earnings growth.
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