Wesfarmers mulls future for Target and Officeworks
There is some talk in the market that Wesfarmers may be considering a move to place its Target department store chain on the market. Picture: NCA NewsWire/Ian Currie
Speculation is mounting that Wesfarmers could be weighing the future of Target and Officeworks from a mergers and acquisitions perspective as it fronts fund managers for its investor day on Thursday.
There is some talk in the market that the $63 billion Perth-based conglomerate may be considering a move to place its Target department store chain on the market – the question as always though is what party would be a buyer, given big private equity and other groups have been shying away from the retail space when it comes to deals.
With respect to Officeworks, the understanding is that Wesfarmers has been impressed with the retailer’s performance under the leadership of Sarah Hunter and sees opportunities in the education space with potential bolt-on acquisitions potentially boosting the company’s performance.
One target could be the local Modern Star business, which Wesfarmers looked at in 2019.
This is before the Australian arm was sold to Pacific Equity Partners in September for $600 million.
Previously, Wesfarmers considered a listing of Officeworks in 2017, but pulled the deal due to fears around the arrival of Amazon Prime into the Australian market.
At that time, the valuation of the business was more than $1bn billion.
During the grip of the global pandemic last year Officeworks pulled off a stellar performance, with its earnings before tax soaring 22 per cent for the six months to December 31 compared to the previous corresponding period.
With respect to Target, its performance might lag that of Kmart but all discount department stores underwent strong sales last year amid Covid-19 and the strong performance continues on the back of booming housing market conditions, fuelled by low interest rates.
This includes the Woolworths-owned rival Big W.
Woolworths spoke to prospective buyers about a potential sale of Big W before the Covid outbreak, but hit pause on a deal when the pandemic started to unfold.
The plan was that Woolworths would retain the stores with challenging leases and run those down over time, and offload the remaining more profitable stores to a buyer as a separate business.
Like Big W, Target had earlier been hit by online retailers and major low-cost global fashion labels entering the Australian market like H&M.
But the pandemic has resulted in a reverse in their fortunes for now.
So far, the plan for Wesfarmers, which counts top Kohlberg Kravis Roberts operative Ed Bostock within its executive ranks, has been to convert Target stores to Kmart stores in good locations.
Target has 289 stores and sits within Wesfarmers’ Kmart Group, which also includes Kmart and online marketplace Catch.
For the six months to December, Target’s sales increased 13 per cent.
The overall Kmart Group had earnings lift 44.3 per cent to $502 million.
Wesfarmers has been focused on simplifying the Target business, prioritising online growth and improving the product offer, with the business expected to be profitable for the full financial year before one-off costs.
There were 85 stores targeted for conversion to Kmart stores this financial year and 89 next financial year.
In a research note out this week, Citi analysts said they believed the focus for the investor day would be on the sales performance over the first five months of the second half of the 2021 financial year and whether Bunnings would embark on further bolt-on acquisitions to build its capacity beyond the “Do It Yourself” market.
This follows the acquisitions of Adelaide Tools and Beaumont Tiles.
The general consensus among analysts is that Bunnings sales will increase 2 per cent and fall 5 per cent for Officeworks during the second half of the 2021 financial year and lift 8 per cent for Kmart Group.
https://www.modernstar.com.au/
“Modern Star is Australia and New Zealand’s number one partner and supplier of educational resources to early childhood services, primary schools and before and after school care programs.”
(20min delay)