Wesfarmers is set to slash the carrying value of the Target business by millions, leaving a gaping hole in its bottom line.
The company confirmed today that it will downgrade the value of goodwill at the Target discount department store chain on its books by $680 million, with the charge to be reflected in its accounts for 2013/14.
“Wesfarmers expects to recognise an impairment charge of approximately $680 million (pre-tax) associated with the Coles Group goodwill apportioned to Target on acquisition in 2007.”
This impairment charge to goodwill represents 35.2 per cent of Target’s carrying amount of allocated goodwill at June 30, 2013, and 4.5 per cent of the group’s carrying amount of goodwill at June 30, 2013 (excluding goodwill associated with the insurance division).
This is in addition to a $94 million hit it will endure to turn around its liquor business, including changes to its Liquorland and First Choice stores and product ranges.
These non-trading items, which include the profit on sale of the Insurance division, a revision to Target’s carrying value and a provision for restructuring of Coles’ Liquor business, are expected to result in a net gain of approximately $261 million to $301 million (pre-tax).
Wesfarmers announced on June 30, 2014 that the sale of its insurance underwriting operations in Australia and New Zealand to Insurance Australia Group had been completed.
Wesfarmers also announced on June 16, 2014 that the sale of its insurance broking and premium funding operations to Arthur J. Gallagher & Co had been completed.
Both these transactions represent approximately $1.845 billion and $1.01 billion respectively.
These sale transactions collectively constitute the entire business operations of Wesfarmers’ Insurance division.
Wesfarmers expects to record a combined pre-tax profit on sale of approximately $1,035million to $1,075 million.
The final sale proceeds and profit impact of both transactions are subject to the finalisation of completion adjustments.
Wesfarmers added, however, that it has created substantial value across other group divisions and across the portfolio of other acquired Coles Group businesses (Coles, Kmart and Officeworks) where overall the value created since the acquisition in 2007 significantly exceeds this impairment charge.
The applicable accounting standards, under which Target’s impairment charge has been made, however, do not allow Wesfarmers to recognise these increases in value in its accounts.
The group’s impairment testing process involves consideration of expected earnings for the fiscal year 2014, which for Target are expected to be in the range of $82 million to $88 million, 2015 financial year (FY2015)operating budgets and longer term divisional outlooks.
This non-cash impairment charge will have no impact on Wesfarmers’ normal business operations and development.
Wesfarmers managing director Richard Goyder said Target is still a work in progress.
“Notwithstanding the revision to Target’s carrying value,we are pleased with the progress that has been made over the last 12 months in materially strengthening Target’s leadership team and we consider there to be many opportunities to significantly improve Target’s performance.”