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Target Troubles: Wesfarmers Flags Writedown

Wesfarmers is set to take a hit on its full-year results, advising today that it expects a non-cash impairment of $1,100 million to $1,300 million pre-tax to be recorded for Target.

The impairment will be recorded as a writedown of Target’s share of goodwill arising on the acquisition of the Coles Group, as well as selected individual store-based assets, Wesfarmers stated.

Wesfarmers expects Target’s underlying earnings before interest and tax for the 2016 financial year to slide to a loss of approximately $50 million, which it attributes to high seasonal clearance activity and lower gross margins

Additionally, restructuring costs and provisions of $145 million have been flagged, which follow a review of the business, with restructuring activities including the restructuring of the store support centre, accelerating the streamlining of Target’s supply chain and resetting its inventory.

Wesfarmers managing director Richard Goyder stated that Wesfarmers has “never shied away from taking tough action in the short term if that is what is required”.

“Whilst Target has made operational progress in recent years, market competition and disruption has continued to accelerate, including from the very strong performance of Kmart,” Goyder commented.

“Within this context, the group created the new Department Stores division, with a mandate to deliver a higher long-term earnings outcome for the overall division.

“Under Guy Russo’s leadership, the new management team has completed a detailed assessment of business opportunities and begun revising strategic plans, which will include greater property coordination as well as accelerating activity in Target to ensure that it has the best foundation possible on which to build future success.”

In April, Wesfarmers had advised that action was being taken against Target employees, following an investigation into supplier rebates arrangements.

The investigation was initiated after it was revealed that “the accounting treatment of a number of Target supplier arrangements negotiated in December 2015 required scrutiny”.

Meanwhile, Fairfax Media has reported that Target competitor Big W has cut buying staff, with about 40 buyers and assistant buyers sacked from Big W’s head office last week

“While buyer numbers have been reduced and some buyerships have been consolidated, we are in the process of recruiting more than 30 new designers across fashion, industrial, graphic and digital to form a centralised and rejuvenated design team,” Fairfax reported Big W chief executive officer Sally Macdonald as stating.

The move comes as Woolworths carries out a review across all aspects of its business. Woolworths has previously stated that an update on the review will be provided at or before its 2016 full-year results.

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