Struggling retail chain Target is primed to announce hundreds of job cuts and a possible operational restructure following its profit warning last month, as the Wesfarmers-backed business tries to dig itself out of a financial hole.

Led by Stuart Machin, Target’s third boss in two years, the attack on the retailer’s cost base is prompted by destructive forces, including excess inventory, increasing theft from stores and a poor start to sales for the second half, exacerbated by the late start to winter.

Already floundering because of sluggish consumer sentiment and the dour economic outlook, Wesfarmers shocked investors two weeks ago with a profit downgrade for Target, flagging a potential second-half loss.

Wesfarmers chief executive Richard Goyder warned full-year earnings before interest and tax at Target would drop to between $140 million and $160 million against EBIT of $148 million in the first half. This could see second-half earnings sink to an $8 million loss or, at the upper end, a $12 million profit.

Wesfarmers also owns Kmart, supermarket chain Coles, hardware group Bunnings and Officeworks.

The dip into the red has cast Target as the problem child of Wesfarmers’ retail empire, with Kmart and Bunnings thriving.

If Mr Machin cannot turn around Target, it will add to pressure on Wesfarmers to finally do away with the troubled chain. Previous options canvassed have included selling it to a private equity buyer or carving up Target stores among Wesfarmers’ other retail banners, to be transformed into liquor stores – under the First Choice, Liquorland or Vintage Cellars brands – or Kmart and Officeworks outlets.

It is a strategy Mr Machin has become expert at with the executive part of the British team that helped resurrect Coles after Wesfarmers bought the underperforming supermarket business more than five years ago. Before shifting to Target in April, Mr Machin was director of Coles’ store development and operations.

A spokesman for Target said the company was reviewing all aspects of the business and had taken a number of actions to turn around its performance. ”There have already been a number of team changes as part of this review and more changes are likely. However, we will work these through wit
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Just as well Paul Zahra is a retailer instead of a banker – otherwise the Australian Competition and Consumer Commission might be wondering if he was attempting a little price signalling while announcing disappointing sales figures.

David Jones’ Zahra isn’t the first shopkeeper to let the market know what he thinks about that nasty habit of discounting. Even while announcing a “Super Saturday” sale, Myer’s Bernie Brookes seemed to be warning Target not to pull the trigger on a discount war. Bernie also came out as a fan of a weaker dollar, claiming there would be more pluses than minuses for Myer.

Really? That argument seems to come down to making international online shopping a little less attractive, but a weaker Aussie equally makes prices on imported stuff at Myer – the vast majority of it – a little less attractive too. Or maybe a softer currency could become an excuse for prices at the troubled discretionary department stores stabilising and inching higher.

‘Middle-order players in the department store space’ … Myer and David Jones. Photo: Erin Jonasson

That’s what Paul Zahra is rather desperately hoping, even while saying he expects everyone else to be slicing prices on excess winter clothing:

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“We continued our strategy of reducing discounting throughout 3Q13 (the April quarter) notwithstanding aggressive promotional activity in the market. Most notably our mid-season sale was reduced by one full week and we removed our $10 million floor stock clearance event.

“Our view is that the ongoing increase in the depth and breadth of discounting that we are seeing in the market is not sustainable. This is a view shared by many brands and as a result we have seen an increase in the number of brands looking to convert their distribution arrangement to department store exclusive agreements with David Jones.

“Having said this, in the short term we expect to see heavy discounting as other retailers attempt to address excess winter inventory issues. Whilst we do not propose to match this expected discounting activity our key June clearance will need to be competitive and we will need to maintain our marketing share of voice.”

So we have David Jones signalling Myer which is signalling Target which is busy signalling distress as the new CEO works out what the chain should be after his two predecessors let it wander in the face of the resurgence by Australia’s biggest department stores: Kmart and Big W.

And that’s why, for all the publicity they garner (including this spray), David Jones and Myer aren’t nearly as important as their media coverage might indicate. Far from representing the mindset of the Australian consumer and the overall health of Australian retailing, the two mid-tier department stores only represent themselves as they struggle to update their 19th-century business models.

They are just the middle-order players in the department store space, which itself is the smallest of the Australian Bureau of Statistics’ six retail categories. A symptom of how sad they’ve become was that Myer’s 0.4 per cent lift in April quarter like-for-like sales last week was greeted as good news, holding out the possibility of recording its first full financial year of sales gains since 2007. Yes, 0.4 per cent – a shop assistant’s sneeze. And never mind today’s announcement that DJs’ like-for-like sales went backwards by 3.4 per cent.

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Michael Pascoe is a BusinessDay contributing editor

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