Christopher Niesche: Gun sent in to sort Target performance

Prime Minister Malcolm Turnbull. Photo / AP
Prime Minister Malcolm Turnbull. Photo / AP

Guy Russo has one of the toughest jobs in retail - turning around the underperforming Target discount stores.

Target's owner Wesfarmers is a favourite stock among retirees for its steadily-growing earnings and dependable dividends.

But Target is the odd-one-out among conglomerate Wesfarmers' stable of retail brands and is threatening the group's performance.

Coles supermarkets, the Kmart discount stores and the Bunnings hardware chain are all performing well, which really shines a light on Target's underperformance.

Target's earnings have fallen more than A$300 million ($314 million) or 75 per cent during the past five years and it will lose A$100 million in the second half of this year.

Investors heard at the Wesfarmers' strategy day last week that the previous Target management had ordered A$100 million in winter stock which won't arrive until next month.

The store is almost certainly going to have to slash prices on that late-arriving inventory just to get it out the door, and thereby break the most basic rule of retailing " that you sell stuff for more than you paid for it.

In the five years that Target's profits have declined, Kmart's profits have doubled to about A$470 million.

That's thanks to Russo who was in charge of Kmart until recently, when he was promoted to run both Kmart and Target.

Russo is a former McDonald's executive who started his working life flipping burgers at one of the chain's stores in Sydney's east in 1974.

He was new to retail when he was lured out of early retirement to fix up Wesfarmers' ailing Kmart stores in 2008. But he obviously had a feel for it - within two years he had doubled the profits and reversed a decade of underperformance.

Now investors are hoping he can work his magic on Target as well.

He hopes to eventually increase sales 10 per cent, profit margins to 10 per cent and return on capital to 20 per cent.

His plan involves slashing costs and prices, halving the number of products, direct sourcing of product rather than relying on wholesalers and importers, and moving away from a reliance on discounts to every-day low prices.

These are the same strategies he employed at Kmart, but he has his work cut out for him at Target.

Three previous bosses of the chain have failed to turn it around and he will also have to be very careful not to cannibalise sales from Kmart, as they are very similar stores.

Russo has argued that Kmart owns the bottom of the discount market while Target is a step above that. Whether shoppers perceive that and stick to their appropriate demographic - bottom of the barrel or not quite bottom of the barrel - is another matter.

Target is one of the few blemishes in the remarkable success story of Wesfarmers.

Since floating in 1984, total shareholder returns (TSR) have averaged 19.7 per cent, well above the 10.8 per cent return of the All Ordinaries Accumulation index.

Returns have slowed down over the past decade, with annual TSR dropping to a still impressive 10.4 per cent.

A A$2 billion write-down to the value of Target and the coal division will dent Wesfarmers' profit this year and the company will have to cut its final dividend.

There's not much Wesfarmers can do about the low coal prices that are hurting its coal business, but if Russo can restore Target to profitability that will go a long way to ensuring that shareholder returns start growing again.

Battle over company tax cuts

Australia goes to the polls next week and one of the key battlegrounds has been the company tax rate.

Malcolm Turnbull's Government has promised to cut corporate tax from 30 per cent to 25 per cent over the next decade, while Bill Shorten's Labor opposes the cut.

Turnbull and his Treasurer Scott Morrison have argued that a lower corporate tax rate means increased economic activity and a higher standard of living.

But it's not quite that clear cut.

In Australia, when a company has paid tax on its profits then distributed the remainder to shareholders by way of dividends, the shareholders are given a credit for the tax already paid by the company.

Lowering the corporate tax rate means the company will pay less tax, but the investor will get a lower tax credit and so pay more tax.

Ultimately, the total amount of tax paid won't really change at all.

Foreign companies from countries with a tax treaty with Australia won't benefit either.

At the margins, the tax cut might help companies with their cash flow and might give them a little more money to invest if they don't pass on the tax cut to shareholders.

But any upside is likely to be small.

Business has long wanted corporate tax cuts, but their introduction exposes a lack of ideas in the government and in the business lobby.

- NZ Herald

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