Wesfarmers says Kmart trade misses expectations

Wesfarmers says trade at its discount department stores Kmart and Target is worse than expected.

Wesfarmers says profit margins have been hurt by fierce competition.

Wesfarmers’ portfolio of businesses will be tarnished again by the underperformance of its discount department stores, with Kmart for the second time since January issuing a profit warning, while earnings at its stablemate Target will wear the bruises of a damaging price war.

Ahead of an investor day, Wesfarmers issued a trading update which revealed that conditions at its discount department had worsened since the new year, which would crunch pre-tax profits for the two stores.

The recent poor performance is a stark switch for Kmart, which for the last four years under Guy Russo had been one of the strongest profit drivers for Wesfarmers, but which is now proving a drag on group profitability.

Mr Russo left Wesfarmers last year as its boss of discount department stores, having transformed Kmart from a serial underperformer to a strong performer. Now it is struggling again.

Guy Russo transformed Kmart but has now left. Picture:Tony Gough

The trading update shows total sales growth for Kmart almost halved from January to June, while like-for-like sales growth retreated from barely positive to a decline.

Wesfarmers said it now expects annual earnings before interest and tax of between $515 million and $565m from continuing operations at the Kmart Group, which includes stores branded Target and Kmart.

The company said profit margins had been hurt by price cuts implemented to stay competitive with rival retailers.

Consumer confidence in Australia remains fragile as a rising cost of living combines with a fading wealth effect driven by a sharp drop in house prices nationally.

In January Wesfarmers was forced to issue a similar profit warning for Kmart. At the time Wesfarmers chief executive Rob Scott said retail sales were “patchy” in November and December, with the sales downturn at its general merchandise store Kmart worse than expected. In January, Wesfarmers warned its Kmart and Target earnings would fall about 7 per cent in the December half to between $385 million and $400 million after a weak Christmas.

Wesfarmers said today that like-for-like sales at Kmart grew by just 0.2 per cent in the 22 weeks through May, while comparable sales at Target fell by 2.3 per cent in the same period.

For Target, that represented a reversal of the 0.5 per cent sales growth reported in its fiscal first half.

Mr Scott said while the trading performance of the Kmart Group is below expectations, Kmart and Target remain focused on delivering greater value, quality and convenience for customers, including through increased investment in online and other digital initiatives.

“Kmart will continue to invest in its customer offer and price leadership strategy that has delivered strong returns over the long term,” Mr Scott said.

With Dow Jones Newswires