Department store Target is preparing for a massive clearance sale, with millions of dollars in stock needing to be cleared over the next six months.
Target’s leadership team revealed the extent of the losses being faced by the retailer in an announcement to the market on Wednesday.
Parent company Wesfarmers informed shareholders of writedowns for both the Target business and its Curragh coal operations, for which it will book a pre-tax, non-cash impairment of between $600 million and $850 million.
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Wesfarmers will book a pre-tax, non-cash impairment of between $1.1 billion and $1.3 billion for Target, which it said will be “mainly against its historic share of the Coles Group goodwill”.
Target’s 2015-16 financial results will also include $145 million for restructuring costs and provisions to “significantly rebase Target and provide a stronger platform for the future”. The costs are in addition to an expected loss of $50 million in the 2016 financial year, which the company said is due to “high seasonal clearance activity and lower gross margins”.
Following the update to its financial results, Wesfarmers’ managing director Richard Goyder spoke about inventory issues in a call with investors.
The retailer will pour $80 million into “resettling” its inventory, including losses from clearance costs and streamlining its product lines.
“The problem we have in Target is not the quality of the inventory,” Goyder said, according to Fairfax.
“We have too much.”
Guy Russo, the former Kmart boss who now heads up both Target and Kmart, agreed.
“What we have is too much stock coming in the back door and not enough going out the front door – that’s it in a nutshell,” he said.
In the same investor call, Wesfarmers finance director Terry Bowen estimated the value of the stock that needs to be cleared at Target in a the next six months to be “in the order of $100 to 200 [million”, according to news.com.au.
How to avoid running into inventory issues
Retail expert Brian Walker told SmartCompany the golden rule of retail is to avoid creating inventory problems in the first place.
This is done by having good process in place and constantly monitoring product lines.
“Link inventory purchases and buying to sales history and forecasts,” Walker says.
“It’s amazing how many retailers don’t link those two. Sales history needs to consider promotional periods, pricing strategy, location – even down to the weather, believe it or not. Then, you also need to set very specific targets on stock turnover, sell-through and profit planning.”
If a clearance sale is necessary, Walker says it’s best to get the stock out of the door as soon as possible and move on.
“The first cut is the best cut,” he says.
“Take the hit, and get it out quickly. Make sure it [the clearance sale] isn’t positioned at the front of the store but at the back, and don’t do it all year round. Ideally, you would have it offsite at a warehouse … or online.”
SmartCompany contacted Target Australia for comment but did not receive a response prior to publication.