Here's why the stunning decision was taken to wipe a billion dollars off Target's value today

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Guy Russo, the head of Wesfarmers’ new department stores division, knows exactly why business at Target stores is shrinking.

“There’s been too much stock coming in the backdoor and not enough out the front door,” he told a media briefing today.

That means that an increasing proportion of goods on sale have been sold for a heavy discount.

Wesfarmers today wrote down the value of Target by $1.3 billion as the retail chain continues to underperform since it was purchased in 2007.

The company foreshadowed $145 million of restructuring costs to get Target back to acceptable profitability.

About 250 jobs have gone and more cost-cutting is on the way but Russo is determined to see profits in the 2017 financial year.

This year, with an expected EBIT (underlying earnings before interest and tax) loss of $50 million now forecast, the Target business could see a negative profit result of more than $1 billion with the added weight of the writedowns and restructuring costs.

“This stuff takes time and it needs to be done right for the long term,” he says. “I think over the next two years we will see a strong Target.”

He still sees Target’s role in retailing as the provider of fashion basics at a low price.

When asked about those before him who’ve tried to make Target work, Russo admitted to be a little nervous about the job ahead.

“I don’t want to fail,” he said.

“I will make this work.”

Russo says that Target, like many retailers in Australia, is currently seeing slower than expected sales because of warm weather. No-one was buying winter clothes.

“Not a lot of people are feeling cold right now,” he said.

As part of the restructure, Target’s headquarters will be moved to Melbourne from Geelong with jobs losses of about 180.

Target’s managing director Stuart Machin resigned last month when it was found that rebate deals had been done with suppliers to boost Target’s earnings by 40% to $74 million for the half year to December.

Wesfarmers is working with suppliers to unwind the deals and action is being taken against the Target employees who were found to be directly involved.

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