Ladies and gentlemen, thank you for holding and welcome to the Wesfarmers Media and Analyst Briefing. Your lines will be muted during the briefing. However, you will have an opportunity to ask questions immediately afterward, and instructions will be provided on how to do this at this time. This call is also being webcast live on the Wesfarmers website and can be accessed from the homepage of wesfarmers.com.au. I would now like to hand the call over to the Managing Director of Wesfarmers Limited, Mr. Rob Scott. Thank you. Please go ahead.
Good morning, everyone, and thanks for joining us on the call today. Joining me is Wesfarmers CFO, Anthony Gianotti, and also the Managing Director of Kmart Group, Ian Bailey. I'll begin with an overview of the announcement today, after which I'll hand over to Ian to provide some further detail regarding the Kmart and the Target network changes. We'll then be happy to take any questions, firstly from analysts and then from the media. Today we provide an update on the strategic review of Target, as well as an update on significant items expected in our 2020 full-year results. The decisions we've announced today will result in significant changes in the Target and Kmart store networks. These decisions are in response to the ongoing structural change and disruption which has been occurring in the retail sector in recent years.
We've seen these changes around the world in retail as customer shopping behavior evolves. COVID-19 is not the cause of this shift, but it is accelerating a number of the changes. Now, over the years, we've made various attempts under various different management teams to address the structural challenges in Target. If we look back over the past decade, we've been very successful with Kmart, and in many ways, Kmart has been a disruptive force in retail with its deep discount pricing and unique products. However, Target has been more challenging. Now, what's different this time is, firstly, that we're approaching the challenges with the store network on an integrated basis. That is, we're asking ourselves the question, "What is the best use of our network for our customers and our shareholders from a capital allocation point of view?" rather than looking at Target and Kmart in silos.
Secondly, we now have much stronger online capabilities, including the new Catch marketplace business that provides new channels to market and opportunities to grow our businesses and brands beyond our store network. These changes are about making Kmart an even stronger business and a more compelling choice for customers. They are also about accelerating the transition of Target to a more commercially viable and easier-to-run business with lower costs, fewer stores, and a stronger online presence. It's important to highlight that the actions announced today relate to the first phase of the Target review. We are continuing our assessment of strategic options for Target and its remaining store network with the aim of ensuring it has a sustainable future as a leading Australian retail brand. We'll provide a further update on this with the group's full-year results in August.
Now, we know that this will be a tough day today for our Target team, and Ian and I assure them that the Kmart Group and Wesfarmers will be doing everything possible to support those affected, including offering many redeployment opportunities within the larger and stronger Kmart. Across the broader Wesfarmers Group, our other businesses remain well-positioned notwithstanding the current environment, and we expect to create more new jobs in Australia over the next year. As a result of the network changes to Kmart Group and to unlock the benefits, we expect to recognize a number of significant items in our 2020 full-year results. These are outlined in our news release, and they include restructuring costs and provisions of approximately AUD 120 million-AUD 170 million before tax, reflecting store closure costs and a reduction in the Target store support office.
We also expect to recognize a non-cash impairment in Target of approximately AUD 430 million-AUD 480 million before tax, and this includes an impairment of the Target brand name. During the 2021 financial year, that is, next financial year, Kmart Group is expected to incur one-off non-operating costs of approximately AUD 120 million-AUD 140 million before tax relating to the conversion of stores and stock clearance activity prior to closure or conversion of stores. In addition to the significant items expected in relation to Kmart Group, we also expect to report a non-cash impairment in our Industrial and Safety division of approximately AUD 300 million before tax, primarily relating to the impairment of Goodwill. In recent months, we've seen continued progress on the turnaround of Blackwell.
However, the deteriorating economic conditions have resulted in lower customer demand in Workwear Group and Greencap, and this, along with the uncertainty as to future economic conditions, has impacted the assumptions used in the assessment of the carrying value of the division. Finally, in relation to the recent partial sales of our interest in Coles, we expect to recognize a pre-tax gain on sale of AUD 290 million, as well as a one-off pre-tax gain of AUD 221 million on the revaluation of the remaining Coles investment. This is required under the accounting standards. Importantly, the accounting impairments in Target and the Industrial and Safety division are non-cash in nature and will not impact the group's credit rating or debt facilities, nor will it impact our approach to our final dividend for the 2020 financial year.
I'll now hand over to Ian to provide some further details on the outcomes of the Kmart and Target review.
Thanks, Rob, and good morning, everyone. As Rob has outlined, we've identified a number of actions to accelerate the growth of Kmart and address the unsustainable financial performance of Target. These actions will take place over the next 12 months, with the majority taking place in the new calendar year. The changes we will implement include the conversion of 10-40 large-format Target stores to Kmart stores and the closure of between 10 and 25 large-format Target stores. Three of these stores, which have already been announced, will close this year, with the remainder closing next calendar year. A range of outcomes has been provided due to the ongoing negotiations with landlords. The conversion of 52 Target country stores to smaller-format Kmart hub stores and the closure of the remaining 50 Target country stores that are not suitable for the conversion to Kmart hub stores.
For the stores which are closing, these stores will also trade through Christmas and close next calendar year. Finally, there is a significant restructure and reduction in size of the Target store support office. The conversion of suitable stores to Kmart will address gaps in the Kmart network and is expected to result in an improved financial performance for the Kmart Group. The conversion of suitable Target country stores to new small-format Kmart hub stores will provide customers in regional Australia with local access to a selected range of Kmart's great value home, apparel, and general merchandise products. Kmart hub stores will benefit from the learnings from the research and development project we have been running in the U.S. involving small-format Anko stores. The conversions and closures will lead to a smaller Target that focuses solely on one format that is much simpler and lower cost to run.
These decisions reflect our continued focus on investing in Kmart, a business with a compelling customer offer and a strong competitive advantage. While the Target store network will be reduced, there will be increased investment in our digital capabilities, including an expanded Click and Collect offering where the full range of Kmart's, Target, and Catch products will be available at all Kmart and Target stores. We are continuing to see strong growth in online sales across the Kmart Group and seeing very encouraging progress in Catch. We recognize these actions will have a significant impact on our Target team members, many of whom have served our business for many years. During this difficult time, I am very committed to supporting them through this transition, and for our impacted store team members, we have the benefit of time to help find alternative opportunities.
All Target team members in Target stores scheduled for conversion to Kmart will be offered the opportunity to join the growing Kmart team. For other affected Target team members, we will work with them to identify and offer other redeployment opportunities in Kmart, Catch, Bunnings, and Officeworks as each of those businesses continues to grow. These decisions have not been taken lightly, but I believe they are essential to the future success of the Kmart Group. Rob, Anthony, and I will now be happy to take questions.
Thank you. We will now begin the question and answer session. If you wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Your first question comes from the line of Shaun Cousins from JPMorgan. Please ask your question.
Great. Thank you very much for the time. Just a question on the wide variance between 10 and 40 conversions of Target to Kmart or 10 to 25 Target closures. Is this dependent on the rent and fit-out assistance you get for those impacted stores, or is this dependent on the extent to which Wesfarmers can access lower rents across the entire Kmart network, please?
Ian, do you want to answer that?
Yeah, absolutely. Shaun is the former rather than the latter. This is the negotiation on those individual stores with each of the landlords. On the first one, on the 10-40, clearly we've identified approximately 40 stores which we think are appropriate to convert that we believe will make good economic sense on the assumption that the landlords agree with that view. Obviously, that's the first negotiation. On the second one, of course, we would like to end up at the lower end of the scale of the 10 versus the 25. That one really comes down to a side-by-side negotiation on the rent.
Good. Sorry, on those 40, is the conversion, is it rent and fit-out assistance, or is it just rent?
It's always going to be a combination because those two elements effectively go hand in hand as we make that assessment. It is a combination.
Fantastic. My second question is just more broadly, maybe for Anthony, could you remind us what sort of intangibles or Goodwill is left in the Target brand? Are you writing it down to zero? On the write-down in industrial and safety, is that primarily related to the Workwear business you bought from Pac Brands, or are you writing down any of the intangibles relating to Blackwoods from the Howard Smith acquisition? Just curious around the write-downs, please.
Yeah. On your first one, Shaun, did it currently have a Pacbrands in the next sort of 90 years or less? If you look at the non-cash intents that we have outlined of AUD 430 million-AUD 480 million, about half of that will be related to the write-down of the brand. We will not be, at this stage, probably writing down the entire brand, but a large component of it. On your second question, the Industrial and Safety business is one CGU. The Goodwill sits at a Wes level, not at a Blackwoods or Coregas level or the individual businesses. The write-off will be against the combined Goodwill. There is a combination. If you look at the makeup of that Goodwill, it is from a combination of businesses, including Coregas.
Some would be in relation to Blackwoods, and some would be in relation to Workwear Group as well.
Great. Thank you very much, Anthony and Ian.
Your next question comes from the line of David Errington from Bank of America. Please ask your question.
Morning, Rob. Morning, Ian. Rob, I'm trying to get my head around the restructuring costs, why you split them out into two buckets. The first bucket, the AUD 120 million-AUD 170 million, which is the Target store closure cost, inventory write-downs, and the reduction in the Target support. But then you've called out, which I find quite peculiar, another AUD 120 million-AUD 140 million that's going to be taken in the 2021 year. And that's relating to conversion of stores and stock clearance activity prior to closure or conversion. I'm really perplexed as to why you're planning to take AUD 120 million-AUD 140 million in 2021 and why you wouldn't just do it all in 2020, get it ready now, get it cleaned out, and why you'd be doing stock clearance activity. I've never seen a company planning stock clearance activity 12 months out.
Can you explain that, please, why you've broken them into two separate buckets?
Sure, David. At a high level, I'll let Anthony talk to the detail, but we are restricted on what we are able to bring to account at the 30th of June based on where we're at in the process. In order to comply with the accounting standards, there's limits to what we're able to book now versus what would need to wait until the next year. There's always, from a practical point of view, when you are closing stores and converting stores, there's always an inevitable, obviously, markdowns around clearance and stock. That is part of what we are providing for as part of the changes next year. Anthony might be able to add to this.
Yeah. Look, that's correct. Under the accounting standards, we can't book all of the store closure provisions by 30 June. What we're obviously trying to do is give you an indication of what the total cost will be. We can only book the first amount at 30 June, and the rest will flow through in FY 2021. As Rob mentioned on the inventory piece, as you know, we're required to undertake evaluation of stock on a net realizable value basis under the accounting standards. When you're closing stores, generally, you clear stock. On the expectation that we'll be closing these stores, we'll be realizing lower margin on that stock as a result of clearance activity. That's effectively what some of that provision represents.
Again, some of it we can take by 30 June, but some of it we're not able to take by 30 June, and we'll flow through the P&L through FY 2021.
Okay. The second question is on the write-down on Wes, the AUD 300 million. Following on from Shaun's question, I understand it's the write-down of the DCF now relative to the impairment. The first half was a really poor first half. I was hoping, factoring in whether my analysis was wrong, but I thought that Blackwoods was gaining a benefit from COVID because of the stocking up of washing materials and detergents and sanitizers. I understood Workwear was deteriorating, but Blackwoods is by far the bigger business in that. I mean, Workwear, my understanding, was significantly smaller. Is this AUD 300 million write-down now a sign that Blackwoods has actually deteriorated further post the first half result? Because otherwise, you should have done this write-down at the first half. I thought that your earnings in Blackwoods would have improved going through COVID.
It looks like has Blackwoods deteriorated since the first half?
Yeah. No, David, as we said, Blackwoods, we've been pleased with the performance of Blackwoods in recent months, and Blackwoods has benefited, as we've said, from some of the COVID-related demands. The reason why we are facing into this now is that both the impact and also the outlook for Workwear Group, Greencap, and indeed Coregas as a result of the downturn in economic activity is largely what is tipping the valuation over. In summary, things are looking more positive on the Blackwoods side, but we're more conservative around the outlook in some of those other businesses.
David, probably just to highlight, just to add to that, as you know, the half-year accounts we highlighted there was basically no headroom in the Industrial and Safety CGU at the half year. Not very far to move in terms of furthering the environment deteriorating further.
As a group, Anthony and Rob, as a group, has that group performance deteriorated since the first half? That was really where I'm going at. Because Anthony, you said that basically the impairment is against the group. So if the impairment's taken today, it's saying that the overall group has deteriorated since the first half, putting it all together.
In terms of short-term performance, it has, David, notwithstanding the improvement of Blackwoods. Just to be clear, the reason why is if you think about corporate uniforms, right? That is a sector that has been very materially impacted by COVID. If you think about the Greencap consulting business, like a lot of other businesses, activity's almost stopped. Although Coregas has been performing reasonably well in terms of the activity on the healthcare side, helping the healthcare system access additional supplies of oxygen, we've seen elective surgery decrease and we've seen industrial activity decrease. These are very, so what we needed to make a judgment of is clearly there are some short-term COVID impacts that are impacting these businesses other than Blackwoods.
We needed to face into those issues, but also make an assessment of the longer-term economic outlook in order to reflect that in the DCF.
Yeah. Thanks, Rob. Thanks, Anthony. Thank you.
Nice to meet you.
Your next question comes from the line of Grant Saligari from Credit Suisse. Please ask your question.
Good morning. Thank you. Thanks for the opportunity. First question is just around understanding the financial commitment you're making here. You're spending sort of the best part of AUD 300 million in cash to affect the change. Are we to interpret that you're basically saying that this strategy you've chosen is generating a cash outcome of AUD 50 million or AUD 60 million or AUD 70 million a year better than a continuation of the current situation? I just want to understand how you've arrived at this decision from a financial rationale perspective, please.
Yes. Grant, Rob here. You're right that the decision is driven by the fact that we think, we believe, that the earnings outcome will be stronger and more accretive as a result of the investment we're making. I won't give a particular number to that because, as you can see from the announcement, there's quite a range of outcomes around what the conversions might be, what terms we may be able to agree with landlords, and so forth. I wouldn't want to give a forecast. We do believe that this investment is justified by virtue of the improved value that should be created over time.
Okay. All right. Thank you for that. On the residual Target stores, can you give some cover as to the sustainability, the profit line there? What can you point to that says that, okay, we narrow down to a 130 store run? The trajectory of that over the long term, what gives you confidence that that is a sustainable position, or is there more work to do on the 130, please?
Yeah. At a high level, Grant, this change will materially reduce the cost base of Target. We also now have the opportunity to leverage online platforms that will help support the growth that we previously did not have before. I will let Ian talk to more about the go-forward Target. Clearly, we have materially simplified the business. That creates opportunities going forward that we have not had previously.
Yeah. Thanks. I mean, I think, Grant, the review isn't finished. I think as we've called out, this was the first phase, and we believe these actions are the right actions under all subsequent scenarios. We're still working through that second part of the equation. What we do know, of course, is that we've got a Target brand which is loved by many customers. And what we now have is a much simpler or what we will have is a much simpler business. A lot of the complexity will be removed as we make these changes, which gives us the business to be a lot more focused on a significantly smaller business as we go forward. Rather than going into the exact details of what that will look like and how it will perform in the future, I think we'll be covering that in future events.
Okay. Good luck with that. Thank you.
Thanks.
Your next question comes from the line of Lisa Hooney from Citi. Please ask your question.
Yeah. Thanks. Hi, Rob. Hi, Anthony. I've got a question around the conversions you've outlined today. Would you say 40 is the upper end for your large-format conversion opportunity across the network, or is there the potential for more, but you haven't done the work yet? Can you also kind of talk through the factors that make a store suitable for conversion to Kmart as well? Just interested in getting some color around that. Thanks.
Yeah. Look, that range definitely represents the bookends of options. Together, Ian's team has done a very detailed review of where network gaps are, also analyzing the different demographic segments around what brands resonate more strongly with customers in different areas. There has been a very detailed network mapping and optimization program that's gone into determining these options. As we said, ultimately, whether or not we can affect the conversions will come down to negotiations with landlords around a range of factors in terms of facilitating the conversion, providing some support around the investment required to make the conversion happen, and then ensuring that we have rental terms that are going to be sustainable for the future. Those are some of the factors that will ultimately determine the numbers.
Okay. Just to confirm, 10-40, you think that's it across the rump of the Target stores left over as well? There's no potential for that to be upsized?
No. Look, we feel that that is appropriate. The one thing that's of interest to note with Kmart and what we've noticed over the years is that it's remarkable how far a customer will travel to go to a Kmart store. And Kmart stores actually draw customers in from a very broad catchment. There is a limit. There is a limit to how many Kmart stores we need. We feel that this does create the opportunity to fill various network gaps. Obviously, we'll continue to expand our retail offer, which is another way of growing sales. As we continue to develop that offer together with Click and Collect and leveraging the Catch platform, that will enable us to get to even more customers.
Okay. Cool. Understood. Just a second one on conversions as well. Can you kind of give us the idea of the costs involved when converting a store and how much you expect to spend per conversion as well? Something in your boxes?
Ian, can I let you cover that one?
Yeah. I mean, it varies considerably, actually, depending upon the store. Every time you do a conversion and you touch the back of house, then that can trigger a whole bunch of compliance costs to fix up to the current code, which gets triggered by that event. You have two pieces. You have the work in the front of house and the work in the back. Typically, it is in the range of AUD 2 million-AUD 4 million per store. Now, of course, part of the landlord negotiations is the extent to, as was covered by one of the earlier questions, is the extent to which we get support from the landlord with that credit card and the extent to which we get some additional help with the rent.
Okay. Cool. Understood. Thanks.
Your next question comes from the line of Ross Curran from Macquarie. Please ask your question.
Hi. Hey, guys. Thanks for taking the call. I know you're reluctant to talk about this, but can I possibly go back to Grant's question? Can you just help us know what Target is going to look like, whatever's left of it, what the whale is going to be, what the store format's going to be, whether there's going to be the same amount of SKUs in it? What are we going to be left with, and what's the profitability of that business?
As Ian said, we're still going through a fair bit of work to better refine the Target offer. What I'd say is that the decisions we're announcing today will help address a number of the structural issues that have held Target back, notably materially reducing the above-store cost base, materially simplifying the business model by essentially moving to one store format that takes an enormous amount of complexity out of the business. You would expect that the ongoing focus on categories will continue to be similar around the focus on apparel, soft home, and the other categories that Target are well known for. Just to be clear about some of the work that we're still doing, the reality is that one of the challenges not only Target faces, but many department store businesses face is their stores are too large.
There is more work ongoing into how can we better optimize the size of the space. Once again, there are opportunities there for discussions and negotiations with landlords to discuss alternative space utilization options. Those are some of the things that we are looking at. I would not want to go into any more detail. We will provide a further update in August. Just on the question of the whale, we will see we are continuing to see the whale decrease over time as a result of the changes we are making. Some of the exits on the Target country side, we had much shorter lease terms. In aggregate dollar terms, they were not as large as the larger stores. You might argue that one of the benefits of the change that we are making is that we are materially de-risking the Target business by reducing the lease liabilities.
There are two elements of what we're talking about today. One is enhancing the value of Kmart, and the other is de-risking Target.
Ross, maybe just to give a slight flavor on that, in terms of the undiscounted lease liability, if we executed on the full program by the end of 2021, we would have the undiscounted lease liability in Target would be about a third lower than it currently is.
Fantastic. The other question, I suppose, just to shift to maybe something more positive, you've talked about growing the Catch Group. Can you help us understand the opportunity that you have here, how much money you're going to spend on it, and maybe the size of marketplaces you see in Australia and how big this business could be?
Yeah. Look, we've been really pleased with the performance of the Catch Group. In fact, as we talked about in our recent updates to the market, we've had very strong performance across e-commerce channels in all of our retail businesses. Catch has provided another opportunity, a very timely opportunity that we did not have before. I think we are really pleased that we've made this significant investment in data and digital in the last couple of years. Across our group, including Catch, Wesfarmers Group is now one of the largest e-commerce retailers in Australia and growing very strongly. What's exciting about Catch is a couple of things. Firstly, it enables us to offer a number of new brands, focus on new categories that we just simply do not currently offer within our retail stores at the moment.
This is a really interesting incremental growth opportunity because it's expanding our addressable markets. The other interesting opportunity with Catch, particularly as it relates to Target, is that it's a way of getting our products to customers and leveraging the great brands we have together with an exciting digital channel. The way we're thinking about utilizing Catch is thinking about, obviously, what products within Target and Kmart make sense within Catch, but also how can we utilize our store footprint for Click and Collect and other options. You might have seen we have undertaken a trial in our Highp oint store in Melbourne where we've actually used some of our surplus space within a Target store to present various best-selling lines in Catch. We'll continue to evaluate some of those opportunities over time.
Thank you.
Your next question comes from the line of Ben Gilbert from UBS. Please ask your question.
Good morning, Rob and team. Just a first question for me. Just interested in how some of the early preliminary discussions have been with the landlords on the stores looking to retain. I'm just wondering, is it more around trying to sort of reduce lease tenure, reduce base rents? Also, just on that point, what sort of impact have you seen on sales productivity per square meter when you converted a Target to a Kmart previously?
Yeah, Ben, I'll let Ian talk to those points.
Yeah. Thanks, Ben. I think the first thing is, when we've been chatting with landlords, we've got quite a variety of landlords, of course, across the portfolio. The conversations vary considerably on the way through. I think a lot are approaching this very positively. What we're doing is we're pretty much talking about the entire portfolio of stores, but of course, with a strong focus on the stores where there's likely to be change as we work through that. Ultimately, we're trying to find outcomes that work for both of us on the way through. I feel we're having some really productive conversations with a number of landlords already. Not surprisingly, we've probably got some work to do with some others as we work our way through.
When you look at the sales productivity of a Target to a Kmart, I mean, obviously, you can look at the top line of the organizations to sort of back-calculate a number, which obviously gives you a much higher sales density of a Kmart to a Target. I'm not sure it's quite as simple as that when you go through because each store has its own nuances based upon the demographics, the competitors, the proximity to other stores, and so on. Clearly, what we're looking to do here is make a commercial decision around the conversions. On these large stores, we're converting them because we think there's a positive economic outcome from doing so.
That requires a sufficient enough uplift to cope with the fact we've got the closure costs of a Target and then we've got the opening costs of a Kmart along with any capital that we need to do the refurbishment. It is very much a commercial decision that we're making.
Thanks. Just final one from me. Just interested in how you're seeing capacity at the back end. I presume, obviously, a lot of these decisions have been driven lots by the performance of Target, but also just by probably a more optimistic view around where online sales longer term. How are you sitting in the back end in terms of capacity at the moment around your online capability? Do you see a need to sort of accelerate investment around that looking forward just in light of the decisions today?
Yeah. Rob, would you like me to tackle that one?
Yeah, go for it.
Yeah. Not surprisingly, when there's high demand and there's growth, investment follows. I think, as everyone would expect, we've seen pretty strong demand in the online space, and we think that's going to continue into the future. Clearly, that's going to attract attention in terms of growth. I'm sure you'll have seen across the businesses, there's been times when they've performed well online, and there's been times when the demand has become too great for us to manage, which is a sure sign we need to upgrade our capability. Certainly, that's the case within Kmart. With that process already underway, we were just a couple of months too late in getting that in place before the spike hit. We'll be continuing to invest through this coming year. Of course, the overall game plan is to grow Cash.
We're going to be continually investing in that business whilst we see that growth opportunity in front of us.
Just to follow up on that final one, you've obviously got three stores down the east coast of Kmart you're effectively fulfilling online out of at the moment. Is that a discussion you're having with the landlords to effectively have pure fulfillment stores in some of these centers if they're in the corner and they couldn't repurpose the space? Does that make sense economically?
Yeah. I mean, to a degree, that was a necessity because of the spike in volume that we had. Also, we had reduced transactions in a number of stores over the, if you like, the peak of the coronavirus period in April. That was why we decided to do the three dark stores as picking only to help us pick faster. Frankly, we did not have the foot traffic coming through those stores at the time. As things return to normal, I think a dark store is probably an option where we have a really underperforming store and we have a lease that is left available. Outside of that, it is a relatively expensive picking space. I would say it is one of those tactical moves we will use from time to time, but I am not sure it is the long-term solution for picking for online.
That's great. Thanks, guys. Appreciate it.
Your next question comes from the line of Michael Simotas from Jefferies. Please ask your question.
Morning, everyone. The first question from me, somewhat related to the previous question. The capacity of the Kmart supply chain in general, a little while back, you had some stock issues. You're clearly looking to put a lot more volume through the supply chain. Where are you up to with that? Does there need to be more investment to handle that volume?
Rob here, I'll make some opening remarks and Ian can add to it. I think Ian and the team have done a fantastic job of addressing those issues, those capacity constraints we had in the business about 18 months ago. Coming into coronavirus, the business, as we've reported, was generating very strong growth. We had fantastic availability, and the supply chain was working very well as a result of a lot of good effort that had gone into it. That is still the case. The challenge, obviously, at the moment is trying to match some quite dramatic changes in demand. Ian and the team have also done a very good job of shortening some of the lead time by leveraging some digital tools with some of our suppliers. We have made some additional progress there.
The key constraint that Ian called out was in relation to the online system. A lot of effort and focus is going into getting that ready to go. To put it into perspective, there were some days and weeks where we were seeing 500%-800% growth. There are not that many traditional mainframe systems that can support that kind of growth. Now, clearly, we are trying to move to a more modern system. Kmart is the one business that we are yet to get onto a more scalable platform. That is really the issue from a broader supply chain point of view.
Okay.
Yeah. I might just add. Michael, we've modeled the volumes, as you would expect, through supply chain. We're confident our distribution centers in Kmart can handle the volume. If I look at where we had our issues a couple of years ago, we've really solved the underlying processes which enable us to be able to scale again. I think the future of supply chain and its continuing evolution is a significant topic. We are applying a lot of energy to that as we continue to digitize the process. Through that, we improve transparency. Through that improved transparency, we can find further ways to reduce lead times, which again de-risk some of the long-term decisions that we've made historically in the business around inventory.
Okay. Thank you. Second question from me is relating to the Target country conversions to small-format Kmart stores. Is there going to be any trial in Australia of that small-format Kmart hub store, or are you committed now to the conversions? If you are, what gives you confidence that that small-format will work, given it hasn't really been tested in this market?
Yeah. Thanks, Michael. We've got a small number of stores which we will be converting this year, which I wouldn't say they're a pilot or a trial. They're actually proving out the model, and it's operationally proving out the model. Our confidence level that there's demand in there is high. We have the technology and the processes that we're effectively pulling back from the Anko trial in the U.S., but we can utilize those. We're confident we can run a, if you like, a faster-speed supply chain for these small stores, which means we can carry a reasonable range without carrying the same depth that we would need to carry in a large store. Our view is that we can run these at a pretty effective productivity, both from an inventory and an operational cost view.
That should give us plenty of headroom from a profit view on each one of those locations. We enter the racetrack feeling like we've got all the ingredients, but we will prove it out in the first three, and we'll refine it before we roll out the remainder.
Okay. Thank you. That makes sense.
Your next question comes from the line of Andrew McLean from Goldman Sachs. Please ask your question.
Good morning, everyone. I'm just wondering, this is a very significant structural change that you're going through, obviously. Just thinking, we've been focusing a lot on both Target and Kmart, but just specifically to Kmart, you're potentially converting 60-100 stores across to this brand. There's going to be a lot of inventory that requires to be cleared. How are you going to try and execute all of that with as minimum disruption? I imagine that you're having to take a view around what product you're going to be sourcing for these conversions to Kmart and what you'll be sourcing for a vastly diminished Target and potentially, in the future, zero stores. I'm just wondering, it's a very complicated process. I'm just wondering how you are going to try and mitigate the disruption impacts to Kmart.
At the same time, you must have an idea and be making decisions around whether or not there is a Target in a few years' time. I'm just wondering why that didn't lead to additional thoughts around write-downs of more leases.
Yeah, Andrew. It's a good question. That is why there's been so much work go into where we've got to today. I'll let Ian talk to some of the more specifics around executing the conversions and the closures and what that means around stock and resourcing at the Kmart level.
Yeah. I'd say, first of all, Andrew, we have experience of undertaking conversions from Kmart to Target, albeit not at this scale. On the converting to Kmart piece, we've got pretty good at it. We've been opening up quite a number of stores over the last few years, including conversions. We're reasonably good at estimating what the sales in those stores are going to be. We carry one range in all stores in Kmart, so there isn't a decision to make about which product at all. It's only a decision about the quantification of each SKU. Again, we've got pretty good history to be able to base that from. What we effectively do is we identify like stores to use as the baseline as we buy for those stores initially.
The time horizons that we have of next calendar year for the majority of the conversions gives us plenty of time to be able to impact our ordering so that we can ensure we've got that inventory available. I feel like we've got a skill there we've got to build out to a larger scale. Equally, on the closure of Targets, we have closed a number of Targets, and we understand how that process works. Again, having that lead time gives us the ability to manage our inventory down in a very deliberate manner so that we try and mitigate the cost of the clearance component that occurs in the end. Clearly, there is a cost component, and that was one of the numbers which is called out in the next year one-offs.
The fact that, just as part of that, you hadn't made any further sort of calls on writing down the lease?
Yeah. We're making commercial decisions would be the number one thing that we're looking at. Our view is the decisions that we've made so far are clearly the right commercial choices. We're going to continue to undertake the review for the second phase, and obviously, we'll make any final calls as we go through that. Clearly, our view at the moment is that it's more commercial for us to trade the stores of Target than it is to close them and pay out the lease.
Okay. Just as an additional question, you guys tend to have a process where you come out with any sort of restructuring charges ahead of the result. I'm just wondering if you could make a comment on the trading performance of the non-Kmart and Target businesses, in particular, Bunnings and Officeworks.
Yeah. There's really nothing that we would add other than what we said. I think it was on the 28th of April where we noted that Bunnings and Officeworks, there was significant growth in sales benefiting from the trends in terms of people spending more time at home and working from home. That comment's still relevant. The only point I would say now, without getting into specific forecasts or trading updates, is that clearly, there's a lot of volatility, as you'd expect and as has been reported, that when relaxations to the restrictions start to relax, and as the stimulus checks hit bank accounts, that can have a pretty significant impact on sales week on week. That's the environment that all retailers are going through at the moment. Directionally, nothing more to add from what we said on the 28th of April.
Okay. Thanks very much.
Your next question comes from the line of Richard Barwick from CLSA. Please ask your question.
Good morning, everyone. My question's around the actual store numbers that you'll end up with here. I'm just trying to get my head around. If you think about the conversions to Kmart, you could end up taking the Kmart number to about 270 stores. You've talked about it, filling in some of the gaps in the portfolio, etc. Does that mean, or what does it mean for the growth outlook for Kmart store numbers once those conversions take place? Is that it then, or do you still see some scope to roll out additional Kmart stores?
Ian?
Yeah. I mean, Richard, clearly, there's an acceleration here of a future new store opening program as we're filling many of the gaps. I think it's fair to assume that the store openings in future years will be reduced from what we've previously outlined. We do, of course, still have store opening potential in New Zealand, which isn't affected by any of the changes that we're talking about today. They will continue, of course. Yeah, clearly, we're getting to quite a number of stores within Australia. The number of gaps that remain are increasingly small.
Okay. I mean, we'll see what number we end up with with Target, but it's going to be around maybe as low as 120 or 130. I mean, that all of a sudden takes you significantly smaller than even Big W that's sitting around the 180 stores. Am I hearing you right? I mean, is the message that you would have potentially you'd be happy enough to get rid of all Target stores if it wasn't for lease obligations? If you're left with sort of the 120, 130, is that a sustainable number then to actually grow from, or is this just a big step down in the continual demise or removal of Target stores?
Ian, do you want to talk to that?
Yeah. I mean, Richard, I mean, Target's a retail brand that's been in Australia for many years, and it is much loved by many of the customers as well as many of our team members. I certainly would not characterize it in the way that I think the question was posed. We believe there is long-term potential for the Target business, but we have more work to prove that out and to really get definitive around what that looks like, which is what the phase two of the review is about. I enter that with a belief that customers want us to find a solution to this question. Obviously, we have to find something that's economically sustainable for the long term, and that's what we're working hard to achieve.
This sounds like you do expect to have those answers for us come August?
I will certainly be able to give you an update at that point. It is very high priority for us. Yeah, we are committing to an update. Hopefully, it will be as meaningful as we can make it at that point.
Okay. Just the last one for me. I'm thinking about there's a lot of shopping centers where there's a Kmart and a Target. Presumably, that will obviously limit your ability to go and convert a Target into a Kmart and end up with two Kmarts in the same shopping center. Is it fair to say that the sort of dual locations, that's where we'll see more likely to see Target closures, or do they tend to be the sites where the Targets are better sites in the first place?
Yeah. I mean, that's one of the scenarios for sure. Clearly, the lease obligation that we have outstanding and the absolute sales that we deliver from the store are important factors. There are many centers where we have strongly performing Kmart and Targets in the same center. It's one of the dynamics. Ultimately, what we look at is trading performance of the Target store in its own right and the sustainability of that performance. That's what's led us to the closure list. The conversion list has really been looking at it from a commercial lens of do we believe we can generate a greater return as a Target store—sorry, as a Kmart store—relative to a Target store? Obviously, the conversions we do, we believe that's the case.
You wouldn't end up with two Kmarts in the same shopping center?
It's not the outcome that we're looking to achieve. No, I'm not sure. Yeah. It's not the intent.
Yeah. Okay. All right. Thank you.
The next question comes from the line of Mr. Phillip Kimber from Evans & Partners. Please ask your question.
Thanks. I said the first question was on you noted the non-cash impairments, whether that's your credit rating or your debt facilities or the dividend. You only specifically mentioned the accounting impairments. There is AUD 200 million-AUD 300 million of cash costs that you're going to take across FY 2020 and 2021. I mean, are you also saying that they won't impact the dividend at all? I just wanted to clarify that.
Yeah. No, I think, Phil, just on that, they'll be cash costs. They are considered like any other cash cost in the business and impact profitability. I guess to the extent that they are material, they'd have an impact, as are operations of the business. I think we're calling out the non-cash costs because they are larger and clearly non-cash and do not have an impact.
Right. But you're going to, I mean, I'm not sure if you're going to take them as extraordinary or non-recurring type items. I was just, I mean, it could impact your dividend if you took them through above the line. And then you just did a normal sort of whatever we think your dividend payout ratio is going to be. I just wasn't sure if because you deliberately left it out, that's where you were sort of heading.
No. No, I think, Phil, what we were trying to get at is, as you know, our franking, or sorry, our dividend policy is very much focused on paying our franking credits. And we have regards to cash flows and other things, not just impact. We do not have a fixed payout ratio, if you like. I think what we were trying to point out is that if you look at the non-cash impairments, which in this case are quite sizable, on the face of them, will not have an impact on the dividend that we pay out for the full year.
Okay. My second question was just around Kmart. You made a big point with Target that you've effectively got one store format now, and you've significantly simplified the business. I just was wondering what the risks are that you're shifting that complexity. In particular, I guess I'm really referring to the small-format country stores. You're shifting that into Kmart. Is that something that concerns you, that by adding a completely different store offering to Kmart, it could actually add complexity to a business which has been fantastic for being very simple and therefore low-cost?
Yeah. It's a good question, Phil, and a lot of thought went into the pros and cons of converting those stores to a Kmart hub-type concept. The view is that the way that we've set up the team, the current plans around how the stores would be configured, set up in a way that it is effective to be quite simple to manage. It also potentially over time opens up opportunities for format options. This is, over time, potentially a growth opportunity, partly why we were experimenting, testing, and learning with the Anko concept in Seattle. We've set this up in a way that it will be quite distinct so as not to confuse or complicate the large format offer. We think we can manage that effectively.
Okay. Thanks, guys.
Your next question comes from the line of Niraj Shah from Morgan Stanley. Please ask your question.
Morning, guys. Just one question from me. You're flagging sort of clearance activity through a significant portion of the Target network through this process, and you've called out that AUD 120 million-AUD 140 million. I'm just keen to get your thoughts on how that might impact trading in the rest of the Target network and potentially Kmart through the transition process.
Ian?
Yeah. To be honest, I think it's probably going to be a drop in the ocean relative to the clearance activity that's going to go on in the next 12 months in the market more broadly. I think this isn't going to be the big deal for the competitive landscape for either the Kmart stores or the Target stores. As I say, we have got some experience of doing this before with Target closures. We have seen the impacts of the clearance activity on nearby stores, and we've factored that into our merchandise planning, or we'll be factoring that into our merchandise planning as we're going forward. At this point, I don't see it as a major concern.
Thanks. That's helpful.
Next question comes from the line of Peter Ryan from ABC. Please ask your question.
Yes, sir. Hi, Rob. Just a quick question. Once you get through the redeployments, how many workers are going to be losing their jobs in terms of net job losses? Also, just as a bit of a follow-up to that, the Agriculture Minister, David Littleproud, has already been out very critical of this decision and saying that shoppers should go elsewhere.
Peter, we spent a lot of time in the planning together with Ian and the team to see how we can minimize the job losses through this decision. In many ways, we're fortunate we have a strong business like Kmart to provide these redeployment opportunities. By pursuing this strategy, it increases the number of jobs that we're able to preserve. After the redeployments that we're highly confident of to Kmart, there's probably in the order of 1,000-1,300 or just under 10% of the Target team whose jobs could be affected. We're also, as Ian said, looking at further redeployment opportunities across the Wesfarmers Group. Setting up a process to enable redeployments across Bunnings and Officeworks if that's possible.
The point I'd like to note as well is, as I said, notwithstanding these difficult decisions and the job losses in Target, we do expect across the Wesfarmers Group that we will create more jobs in Australia over the next 12 months. What we really need to do is to make sure that our businesses are viable for the future. There's a lot of change going on in the market, not just COVID-related. If we do want to provide sustainable jobs for our teams into the future, unfortunately, at times, we do need to make some of these difficult decisions. That's all I'd say on that.
Any response to the Agriculture Minister's criticism there?
Oh, look, I think we all recognize it's really disappointing. It's really disappointing, and it's really tough when people lose their jobs. As I said, we've been focused on doing everything we can to reduce the impact. We're also very focused on doing what we can to do all the right, not only all the right things around redundancy and transferring entitlements, but to the extent we can go above and beyond to help team members through this time. That is what we're doing, and that's what we're communicating with our team at the moment. I can understand those comments are probably spurred by disappointment. We're all disappointed with what's happening with jobs in Australia at the moment. As I said, I'm quite, I think the Wesfarmers Group is doing a good job at creating new jobs for Australians.
Across the group, we are continuing to invest. We're investing heavily in communities around Australia. We have materially increased our investment in various community activities and supporting our team through coronavirus. Frankly, I'm very proud of the way that our team's performed in recent months. I hope we can continue to do this. By having strong businesses, we'll create hopefully more job opportunities in the future.
Thank you.
The next question comes from the line of Eli Greenblat from News Corp. Please ask your question.
Hello. Good morning, Rob. On Target, on the write-downs. To date, since going back, what's been kind of roughly the total write-down impairments for Target to this time?
I couldn't tell you off the top of my head. Happy to go back and look at the numbers. I recall many years ago there was a reallocation of some value across Target and Kmart at one stage. Yeah, I won't try and guess what the number is, but we can follow up offline.
I'm going to be sorry. Just on Anko, can you just add a bit more to that? What actually kind of, I was going to say Anko as a brand, but what have you been trialing in Seattle? What are you bringing back here? What will the average consumer see about Anko in the stores? What are you planning? What's that all about?
I think there are two things. First of all, Anko is the brand that we use for a lot of unique Kmart products. That is, our customers would know the Anko brand. Probably turning to your question of what we've been trialing, we have been trialing some small-format offers and utilizing technology in different ways to address some of the opportunities around smaller-format stores. I'll let Ian talk specifically to what we've learned through that and what's being brought back into Australia.
Yeah. Yeah. Thanks, Eli. It's really process and technology is what we've been working on in the small-format within the U.S. What it enables us to do, it enables us to move single SKUs very efficiently at a store level. If you think about a Kmart store today, we move cartons and we move pallets, and that's how the supply chain works. Now, as you go to a smaller-format store, that just leads to too much of any one item. What we've developed is a mechanism and a way of moving product very quickly in small volumes at low cost. That's what the trial has really been enabling. That enables us to create a really good store format with good SKU density and good availability. That's what customers will see in the Kmart hubs when they come to life.
Is Anko an actual brand? Will I see the Anko brand, or maybe I'm a bit confused? Sorry.
Yeah. No. In the U.S., we used Anko as the brand because obviously Kmart is a U.S. brand already. There would be a conflict there. We used Anko as the brand. Anko is our house brand name. It's on the vast majority of our products already. That's why we use that name.
Okay. In Australia, you'll be using some of those logistics and supply chain learnings, so I'll have a word, but the learnings to implement that in maybe small-format stores to help you move around products?
Correct. It's one of the reasons why I think there's a question earlier around complexity and how do we worry we're going to overcomplicate Kmart. We're very paranoid about that. We wanted to make sure we knew how to run these stores before we made the call to make the conversion. We feel like we've learned enough from the work we were doing in Anko that we could run these efficiently without distracting the core business from the big stores, which are clearly going to be the major economic driver of Kmart.
Okay. It is not an Anko store you are opening. It is just within Kmart?
Yeah. No, no. Anko was just a label for the U.S. stores. Customers in Australia will only see Kmart or Kmart hub.
Got it. Sorry. Just, Rob, very quick last question. You mentioned Digital Catch Group, obviously going very well. Your online sales are really going well. Are you finding any issues with congestion in that last mile as you deliver that product to the consumer's home? Is there congestion there? Are you finding problems with that logistics, that kind of last mile end?
There are some bottlenecks and challenges there just simply as a function of the very strong growth we have seen across the market. Now, I think as a general point, we are managing that reasonably well across the partnerships we have with various last-mile providers. It is one of the factors that not only impacts us, it impacts the rest of the market that is leading to some delays around delivery at the moment.
Okay. Thank you.
Your next question comes from the line of Sean Smith from The West Australian. Please ask your question.
Where do you see Target sitting in the marketplace? What's the offer that's going to be that's going to pull people through the doors?
Sean, I think I just got the last bit of your question. Your question was around, obviously, where do we see the Target offer sitting in order to attract customers? Is that?
Yeah. Yeah. Because I still think there's quite a bit of data sustainability. I mean, you insist that it's trusted and it's well-loved, but it matters for nothing surely if you can't get people through the door. What do you see in the future retail brands in Australia?
I guess what's probably fairly obvious based on the announcement today is that Kmart has been incredibly successful at winning a range of customers. As Kmart continues to develop its business, not only are we winning a lot of the value-orientated customers, but we're also attracting customers to Kmart by virtue of having savvy products and on-trend products and so forth. Notwithstanding the fact that we're very cheap. Coming back to Target, and Ian can add to this, we do see a number of Target products, particularly across the apparel categories, various home categories, resonating with customers. Target stores tend to perform better in some market segments than others. We do feel that there is a gap between what Kmart offers and what some of the higher-priced specialty chains offer. That is really where Target is looking to play.
Clearly, that market opportunity is nowhere near as large as it is for a business like Kmart. That is why a smaller network, a network that is more orientated towards online, is what we think is going to be part of the formula that will resonate with customers in the future.
Thanks.
Your next question comes from the line of Dominic Powell from The Age. Please ask your question.
Hey, guys. Can I just get a bit more color, I suppose, around why you're focusing the sort of conversions and closures on Target country, especially in some situations that may leave regional towns without any sort of department store offering whatsoever?
Ian, I'll let you talk to the thinking around the Target country stores.
Yeah. Thanks, Dominic. The Target Country model for the Target business was complex. We had many formats, obviously, in many locations, which really made the supply chain really complicated. It added a lot of complication in the office as well as throughout the supply chain of the organization as well, which was really quite inefficient to run. When we've looked at moving the Target Countries to Kmart hubs, we applied two lenses to it. The first lens we applied was, is there a Kmart nearby? If we have a Target Country right next to a Kmart, then we said, "You know what? It makes sense for us to close that store." The second lens we applied is, is it below 1,000 sq m?
What we've been looking at is in that Kmart model and the Kmart hub model to get that standardization, to get the simplicity of operation, we needed 1,000 sq m to make it work. Where we've got stores which are a long way from a Kmart and they're below 1,000 sq m, they're the ones which are lined up for closure. We do understand the impact that has on regional communities, and it's not a decision that we made lightly. If we could find an economic way of serving those communities with stores in those locations, we would love to have done so.
We will continue to serve them through online, of course, and we'll be working with each of the communities where we do have a closure to do whatever we can to try and find solutions and help for the team members who are in those stores. If we don't have Wesfarmers brands in those towns, then we'll seek to work with other retailers to do what we can to find those team members' alternate positions.
Is there any chance that in the future we could see more rollouts of the small-format Officeworks or Bunnings stores? I know you've trialed them in some locations. As more Target stores are slated for closure, that you can sort of slot in smaller-format other Wesfarmers brands in there?
One of the things that we have been looking at as part of better utilizing the network that we currently have within Target is if in areas where we may not have a viable Target, are there other brands within the Wesfarmers portfolio that could provide a viable offer there? There are a small number of stores where we are evaluating those opportunities, but there is a yeah, there's only a handful of stores where that may be relevant or that may be possible.
Great. All right. Thanks, guys.
Next question comes from the line of Ben Butler from The Guardian. Please ask your question.
Good day, guys. Just wondering, you said earlier that you've been trying to fix Target for 10 years. What actually went wrong with Target? What was the problem?
I think as I said today in the outline, I do not think anyone is surprised by the changes that we have seen within the retail landscape over the last decade or so. We have seen a number of disruptive trends. We have seen in Australia, at least, and this is common across the world, we have had very strong growth in e-commerce. We have seen a number of international specialist chains come into the Australian market. The retail market is fiercely competitive, particularly at this mid-market apparel homeware area. You just need to look around at the large department stores within Australia and offshore, and you can see that a number of those that operate in that mid-market area are really challenged. We have made every effort within Wesfarmers to find a sustainable path forward to Target. We do not like cutting. We do not like decreasing the size of our business.
It's terrible when you have to go through the process of letting your team members go. Unfortunately, after a decade or so, we're fighting against a number of forces at play that make it impossible to continue to run a Target business of the size that we had 10 years ago. These changes are really around facing into these disruptive forces in the retail market and giving Target every success to be sustainable in the future.
All right. On the rent issue, how much are you looking for a cut in the rent? What sort of rent reduction do you want from your landlord? Are you interested in moving to a turnover-based rent?
It's hard to generalize on that because in every store, there's going to be unique issues. There are many stores where we are quite comfortable with the arrangements that we have in place, and we feel it's a win-win for the landlord and for ourselves. As we talked about today, there are some stores that are going to require some capital investment in order to make it a viable Kmart going forward. There are others where we can't see a path forward. There are other centers and stores where the market's been materially impacted where you really do need to see a decrease in rent. It's difficult for us to provide a fixed number because it's really a case-by-case situation.
What about turnover? The sales growth sales model of how much of rent that's floating around out there? Are you interested in paying rent on that basis?
I think it's a useful benchmark to consider when you're looking at the viability of stores because it's worth noting that a number of these rent agreements were set 10, 15 years ago. As I said, the retail market has changed materially. The quality of certain centers and sites has changed materially. Assessing rent as a percentage of sales is a useful benchmark that the market can look at to determine whether it is a viable level of rent for the future.
Thank you.
There are no further questions at this time. Please continue.
Thanks very much, everyone, for your time. If any questions, please contact us either through the media team or the investor relations team. Thank you.
Thank you. Ladies and gentlemen, that concludes our conference for today. Thank you for participating. You may all now disconnect.