The signage for a Target store is seen in Sydney on Thursday, Oct. 22, 2015. Wesfarmers total sales for the quarter were up 11.6 per cent to $2.5 billion compared to the same period last year. (AAP Image/Paul Miller) NO ARCHIVING

Kmart and Target most at risk.

Investment bank Morgan Stanley believes Wesfarmers will suffer a $400 million hit to its earnings by 2026 due to the arrival of Amazon.

“We believe that Wesfarmers’ department store businesses Kmart and Target are particularly susceptible as Amazon rolls out its first party product and Prime offer,” Tom Kierath from the Morgan Stanley retail team said.

(AAP Image/Paul Miller) 

“The Australian department stores look far more exposed than leading specialty retailers, in our view, because Australia is over-built with department stores compared with other developed markets, the department stores’ long leases mean they can’t close stores as they become unprofitable, their online offer is weak by department store standards, and they generate a disproportionate percentage of sales from apparel, a category where Amazon is successful.

“Target will be loss making until 2020 before Amazon has significant impact on its business and we believe that its large operating leases leave it little financial flexibility. Based on our estimates for Amazon share gains and incremental margins, we see Wesfarmers losing $400 million (7.9% of group) EBIT by 2026 and have lowered our valuations for Kmart, Target and Bunnings,” he continued.

On Wednesday Wesfarmers’ Richard Goyder and Rob Scott will be updating investors on the company’s strategy.