Discount department store Target has a long road ahead after half-year revenue numbers saw a big drops in revenue, though retail experts say Wesfarmers should stick with the turnaround plan for the long haul.
Wesfarmers released its financial results for the first half of the 2017 financial year and named a new chief executive this week, with the group saying the performance of Target was a result of a “difficult trading period, reflecting significant business transition”.
The discount department retailer experienced a 17.4% overall decline in sales and a decrease in earnings before interest and tax (EBIT) of 78.4%, to $16 million.
Buying and inventory programs were also completely reset during this period, the company says, which had an impact on when the business got seasonal clothing stock over the past six months.
Chief executive Guy Russo, who has been overseeing a plan that will overhaul the department store’s inventory and move away from promotional discount events and towards overall lower pricing, admitted there were some things at the chain that could have been done differently.
“We had some missed opportunities though, which I’m happy to call out, particularly in summer seasonal product and our levels of fashion in women’s and children,” he said, according to Fairfax reports.
In 2016 Russo made the decision to axe Target’s traditional Christmas toy sale due to profitability concerns, a move that caused customers significant frustrations.
At that time Russo claimed he didn’t have a “Plan B” for the company’s turnaround, a comment Michael Stapleton from the Association of Virtual CFOs told SmartCompany was not how he would advise others to run a turnaround plan as companies generally benefit from pivoting to new ideas when one doesn’t work.
“It’s about continuous improvement,” Stapleton said.
“You’re constantly measuring whether things work and if they don’t, you go to the next plan.”
However, Wesfarmers said Target’s most recent numbers have been affected by restructuring costs, which are not likely be repeated in the second half of 2017.
Brian Walker, chief executive of the Retail Doctor Group, says the move towards a better “fast fashion” style offering at Target was always going to take a significant chunk of time.
“I would say they’re at least a three-to-five year turnaround. They’re at the very very early stage, there’s more work to do there,” he told SmartCompany.
The value of staying for the long haul
Speculation has run high about the prospect of Wesfarmers re-evaluting, or even spinning out or selling, parts of its business when incoming chief executive Rob Scott takes the wheel at the end of 2017.
Comments from current Wesfarmers chief executive Richard Goyder around evaluating options for a possible sale of Officeworks has sparked further interest in the future of operations like Target, but Walker says the company would be best served to hold on to discount department store long term.
“The challenge with divesting a business like Target is that you potentially let a competitor in, so there’s a defensive move,” he says.
“If you let go of those sites, you only get a short term cash injection.”
Wesfarmers’ other discount department store business Kmart, which is also headed up by Russo, is performing better than the Target brand; its earnings for the six-month period were up 16.3% to $371 million.
Walker says that while some Targets could potentially be rebranded into Kmart stores in future, it makes sense for management to continue its focus on reshaping the product offering and approach to better match other low-cost international retailers.
“It’s all a question of what [Russo] got when he started, which was a basket case,” Walker says.
“The discount department store is up to a $12 billion sector I think. They’re going to work on Target, stick with it.”