Wesfarmers warns of Kmart, Target sales slowdown

The first cracks in consumer spending could be starting to emerge after Wesfarmers downgraded Kmart’s sales forecast.

Wesfarmers chief executive Rob Scott. Picture: Sharon Smith

The first cracks in consumer spending could be starting to emerge after Wesfarmers downgraded Kmart’s sales forecast, with its women’s apparel category particularly squeezed over Christmas.

The surprise sales and profit warning from Wesfarmers yesterday for both Kmart and Target comes after outdoor adventurewear and equipment retailer Kathmandu became the first to confess that trading was subdued over the summer.

Consumer durables group Gale Pacific, which owns a popular range of shade cloths and gazebos, also admitted to a slump in sales.

With Kmart sporting the scars of a poor sales performance over November and December, all eyes will turn to the loss-making Big W and the struggling Myer to see if Christmas and New Year sales have also evaporated for them.

The sales retreat will result in Wesfarmers’ combined Kmart and Target businesses reporting pre-tax earnings of $385 million- $400m, against market expectations of as high as $450m.

Jittery investors sold down their positions in Wesfarmers, with its shares ending down 2.16 per cent at $31.26.

But Wesfarmers chief executive Rob Scott said that while retail sales were “patchy” in November and December, he did not believe consumers were in distress despite facing falling property prices, stagnant wages growth and higher energy and fuel bills.

Mr Scott also blamed a reluctance by Kmart to discount as deeply as it did during the previous Christmas for the sales retreat. The Kmart team led by general manager Ian Bailey is now working on its revival, especially in the women’s apparel category.

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“Overall, customers are value-conscious. There are some cost-of-living issues out there, but overall Christmas trading was broadly in line with our expectations,’’ Mr Scott told The Australian yes­terday. “December and November were a bit patchy in terms of ­trading.’’

Mr Scott said Wesfarmers had warned investors at its annual general meeting in late November that the strong sales momentum at Kmart would start to moderate, although this had now fallen more than expected as Kmart pulled back on discounting in the face of strong competition in women’s apparel.

“Firstly we mentioned in the prior corresponding period we lowered our prices significantly and achieved very strong volume growth,” Mr Scott said. “Now that placed a lot of pressure on Kmart last year and Ian Bailey called it out last year. When volumes are growing 10-20 per cent it is putting a lot of pressure on our stores and supply chain.

“So the Kmart team tried to get the balance right around pricing and, although we lowered prices, we didn’t lower them as much as we had in the prior year. So I think part of it (the sales downturn) was probably sales-related, but also women’s apparel is a dynamic category and we need to make sure we have product that is resonating really strongly with our customers, and that is what we have been working on.’’

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Mr Scott said consumers were aware of the pressures on their budgets, but at this stage he did not believe consumers were shunning the stores or radically pulling back on spending.

“We don’t see any evidence that there is a broad change in consumer spending across the board,” he said. “We find that when we get our offer right we can generate good sales. There is no doubt when you look back on the last half, when customers are reading about house price issues and seeing cost-of-living pressures in areas like fuel and electricity, that does have some impact.

“But we still feel that consumer spending is reasonably robust.’’

Like-for-like sales at Kmart for the December half fell 0.6 per cent, against sales growth of more than 3 per cent for the same time last year and same-store sales of almost 5 per cent in late 2017, when the chain was the best-performing retailer in the highly competitive discount department store sector.

For the 2018 fiscal year, Kmart reported total sales growth of 8 per cent and like-for-like sales growth of 5.4 per cent to make it one of the best performers in the sector.

Wesfarmers said in its ASX announcement yesterday that the trading performance of the group’s retail divisions was generally in line with management expectations, with the exception of the department stores business.

It revealed that for the 2019 half year, total sales in Kmart (excluding Kmart Tyre and Auto, which it sold) increased by 1 per cent, with comparable sales declining by 0.6 per cent.

The company said Kmart sales growth during the period was ­affected by the planned exit from the low-margin DVD category, which had previously accounted for about 1 per cent of sales, as well as weaker sales in apparel categories, particularly in womenswear.

There was also moderated growth in everyday products compared to the 2018 half year, which saw significant growth in units stimulated by investment.

At Target, total sales increased by 0.2 per cent, with comparable sales increasing by 0.5 per cent, representing an improvement on the prior corresponding period.

“Pleasingly, inventory levels in both Kmart and Target remain at appropriate levels,” a Wesfarmers statement to the ASX said. “The moderation in sales growth in Kmart is expected to result in earnings before interest and tax for department stores for the half year ending December 31 between $385m and $400m, excluding the gain on disposal of Kmart Tyre and Auto.”

During the half, Wesfarmers took several steps to reposition the group’s portfolio, including the demerger of Coles, the divestment of the Bengalla coal mine, the divestment of Kmart Tyre and Auto and the divestment of the group’s interest in Quadrant Energy.

“Following the receipt of proceeds from these transactions, the group’s balance sheet is in a strong position, with net financial debt reducing from $3.6 billion at June 20, 2018, to an unaudited net debt position of approximately $300m at December 31, 2018,” it said in an update on its preliminary balance sheet position.

But there would be significant items expected in the 2019 half-year results that would include a number of significant items relating to discontinued operations.

There would be a gain on the disposal of Bengalla of $670m-$680m, a gain on the disposal of Kmart Tyre and Auto of $265m-$275m, and a gain on the disposal of interest in Quadrant Energy of $US98m ($136.3m), Wesfarmers said.