It’s the end of Target as we know it ... but the big winner this week is energy

By Jonathan Jackson. Published at May 22, 2020, in Features

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Wesfarmers (ASX:WES) announced the closure or conversion of up to 167 of Target’s 289 stores on Friday morning, with 92 of these stores becoming Kmart locations.

IBIS World reports that Target has underperformed Kmart over the past five years, with the brand’s sales declining significantly after a brief boost in February and March 2020 due to consumer stockpiling activity.

The $44 billion capped Wesfarmers holds an estimated market share of 45% in the Department Stores industry, with revenue attributable to the Kmart Group (which includes Kmart and Target) expected to increase at an annualised 0.4% over the five years through 2019-20, to approximately $8.1 billion. Most of this growth has stemmed from Kmart, which exhibited sales growth of 1.5% in 2018-19, while sales revenue for Target declined by the same amount.

Declining discretionary incomes and fluctuating consumer sentiment have encouraged shoppers to favour discount stores over the past five years. Revenue for the Department Stores industry is expected to decline at an annualised 2.0% over the five years through 2019-20 to $18.0 billion. This trend includes an expected fall of 4.8% in the current year due to weak shopping activity resulting from the COVID-19 pandemic.

Wesfarmers has slowly rationalised Target’s store network over the past five years to focus on Kmart.

‘Consumer demand is becoming increasingly polarised, with shoppers seeking either ultra-low-cost or high-quality, ethically made goods. Target’s mid-market position has failed to appeal to either of these types of shoppers,’ said IBISWorld Senior Industry Analyst Daisy Feller.

While one of Australia’s biggest stocks puts the knife into treasured retailers, there’s better news on the small cap front.

5 Aussie small caps to watch

  1. DiscovEx Resources Limited (ASX: DCX) closed as high as 75% this week after announcing that follow-up work at the Hornet Prospect in the southern Laverton District of Western Australia indicates the potential for a major new gold discovery in the region.
  2. Drone Shield Limited (ASX: DRO) was as high as 62% after they announced a competitive tender for its DroneGun TacticalTM product was selected as the preferred solution by the European Union police forces.
  3. Panterra Gold Limited (ASX: PGI) was up as high 79% this week as they announced the Cuban Government has approved the proposed Joint Venture between its mining company, Geo Minera SA and PanTerra Gold Investments Limited. The venture will be used to develop GMSA’s La Demajagua refractory gold/silver deposit on the Isle of Youth in SW Cuba.
  4. Rarex Limited (ASX: REE) was up as high as 71% after announcing that the first diamond drill hole at its Trundle Park target, at the Trundle project, has been completed at 685 meters in depth. The Trundle project is located 30km west of the China Molybdenum Company Limited (CMOC) operated Northparkes copper-gold project, in the same Northparkes Igneous Complex.
  5. Anson Resources Limited (ASX: ASN) was up as high as 57% after the independent third party engineering company conducting the Preliminary Economic Assessment (PEA) for its Paradox Brine Project, located Utah, USA announced it had completed the study.

The best and worst performing sectors this week?

Energy was the big winner up over 7 per cent on the back of oil rising off historical lows. It remains to be seen, whether the world takes a bullish outlook on this sector yet.

Materials and commodities rose over 6 per cent, while Information Technology wasn’t far behind up over 5 per cent at time of Friday writing.

The worst sectors were Utilities down almost 2 per cent, Consumer Staples and Healthcare down under 1 percent, and Financials which was just in the green.

Looking at the ASX top 100 stocks, Worley and Oil Search were two of the best performers up over 16 per cent. Santos was up over 15 per cent while Vicinity Centres and Stockland were both up over 12 per cent.

What's next for the Australian stock market?

“Over the past four weeks, the Australian market has failed to push higher in a sign of indecision and a lack of direction,” says Wealth Within founder and analyst Dale Gillham.

“Last week I mentioned that I thought the market would pick a direction soon and we may have seen that given that this week the market has risen over 3 per cent as of writing. More importantly, the price has broken above the previous high of 5,618 points set on 17 April, so my opinion is starting to change from one of being bearish to bullish.

“That said, I still believe caution needs to be exercised, as the emotions in the market are still running high and stocks are being punished on negative news. Therefore, the market could fall heavily on any negative news, so it will pay investors to be conservative and to only buy quality stocks.

“If the market is bullish, we will see the rise continue for the next two to three weeks with it likely to break above 6,000 points. However, if there is any weakness during this time, the good times that we have experienced in the last month may be over and we may need to get ready for the next fall.”

S3 Consortium Pty Ltd (CAR No.433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information only. Any advice is general advice only. Neither your personal objectives, financial situation nor needs have been taken into consideration. Accordingly you should consider how appropriate the advice (if any) is to those objectives, financial situation and needs, before acting on the advice.

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S3 Consortium Pty Ltd does and seeks to do business with companies featured in its articles. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this article. Investors should consider this article as only a single factor in making any investment decision. The publishers of this article also wish to disclose that they may hold this stock in their portfolios and that any decision to purchase this stock should be done so after the purchaser has made their own inquires as to the validity of any information in this article.

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