Shoppers will keep flocking to Kmart amid persistent inflation: Wesfarmers CEO

The chief executive of Wesfarmers says high inflation will see shoppers continue to look for value after Kmart’s budget home brand Anko boosted the retail conglomerate’s half-year profits.

Wesfarmers boss Rob Scott said customers’ appetite for more affordable products was prompting the company to try and expand low-price offerings despite “persistent” inflation driving up its wages and payroll tax, as well as costs for electricity, utilities, rent and insurances.

Wesfarmers CEO Rob Scott sees ongoing cost-of-living pressures in 2024 driving shoppers to look for value.Credit: Ross Swanborough

“It’s costing business more to operate. Then that has the risk of blowing through to prices, or at the minimum, stopping prices from coming down,” Scott told this masthead. “If domestic cost pressures stay higher for longer, that is going to continue to place more pressure on households.”

The ASX-listed retail giant, which also owns the Officeworks and Bunnings chains, on Thursday said its net profit rose 3 per cent to $1.4 billion in the six months to December 31, the first half of the financial year.

Overall revenue ticked up 0.5 per cent to $22.7 billion, thanks to Kmart’s 4.8 per cent revenue lift to nearly $6 billion, while sales at catch.com.au and the company’s chemicals and fertiliser division disappointed.

The result beat market expectations, sending Wesfarmers’ shares more than 4 per cent higher.

Kmart has posted record earnings, driving Wesfarmers’ overall half-year results.Credit: iStock

Kmart’s earnings jumped 26.5 per cent to a record high of $601 million following strong demand for its Anko range (which represents 85 per cent of store products) and women’s and youth clothing.

The discount chain’s beauty and home storage products were also performing well, and helped lure in younger customers. Meanwhile, furniture sales have softened as the lockdown-driven demand to upgrade home furnishings declined.

Kmart boss Ian Bailey, who gave a presentation on the Australian business at a US conference in January, said he was in “half a dozen conversations” with US and European retailers about stocking Anko products, but it was “very early days”.

The discount department store has dropped prices on some 1300 products over the past six months, and said it would keep a focus on reducing its operating costs amid higher inflation, supply-chain costs and staff shortages.

Taking a leaf out of Kmart’s book, Bunnings has also pivoted to focus on private label and affordable product offerings, which resulted in more foot traffic to stores, bigger basket sizes and more items sold in the December half. Its revenues increased 1.7 per cent in the period, with online sales rising 5.1 per cent.

Bunnings’ move to expand its cleaning and pet ranges also won customers eager to save by bulk-buying.

Officeworks’ 1.8 per cent growth in revenue to $1.7 billion in the half was driven by demand for stationery, art and school supplies, and tech products, while sales for office furniture declined.

Scott said the strategy of everyday low pricing at Kmart, Officeworks and Bunnings – rather than the high-low pricing approach of the supermarket giants, which leans on discounts and promotional periods – had resonated with customers, even as they increasingly wait for sales events such as Black Friday.

“Interestingly, we found that our everyday low prices were resonating really well through Black Friday,” Scott said.

Catch.com.au was the most significant drag on Wesfarmers’ result, with revenue slumping nearly 38 per cent as the website slashed unprofitable product lines to focus on higher-demand categories. The online marketplace is expected to be unprofitable for the entire financial year, though losses in the second half are expected to be less than the first half.

WesCEF, the ASX giant’s chemicals, energy and fertiliser business, saw its sales fall by 21 per cent amid volatility in the price of lithium, which has dropped due to oversupply, softer demand from China, and lower US electric vehicle sales.

Wesfarmers will pay a fully franked interim dividend of 91 cents per share, representing a 3.4 per cent uptick on the same time last year.

Looking at the current half, Wesfarmers said Kmart has “continued to deliver strong sales growth” during January and the first week of February, while Bunnings’ and Officeworks’ sales were “broadly in line” with the same period last year.

MST Marquee senior research analyst Craig Woolford described Kmart’s result as “outstanding” and noted that Wesfarmers’ operating cash flow of $2.9 billion, an uptick of 47 per cent, was “very good”.

“Wesfarmers has delivered a good result driven by cost control and Kmart,” he wrote in a note to clients. However, he noted some weakness in revenue from new Bunnings stores.

Analysts from Jarden said the half-year figures were “another quality result”.

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