Australian Retail Sector Weakens, Impacts Wesfarmers’ Kmart And Target

Australian retail sales fell by 0.1 per cent in April in seasonally adjusted terms, as indicated by the recently released data by the Australian Bureau of Statistics. The result was well below the rise of 0.2 per cent expected by the financial markets. Also, it was the first such decline in sales witnessed since December 2018.

However, in trend terms, the retail turnover improved 0.2 per cent in April, with the major share from industries like Cafes, restaurants and takeaway food services (0.4 per cent) and Food retailing (0.4 per cent).

What NAB’s Survey Says About Australia’s Retail Sector?

According to a recent ‘NAB Monthly Business Survey’ for May 2019 released by the National Australia Bank (ASX: NAB), the business conditions have weakened in Australia, and the retail sector is ‘’clearly in recession.’’ The retail and wholesale sectors have deteriorated sharply over recent months, as indicated by the survey. NAB economists state that this deterioration has reached a level not seen since the global financial crisis.

As per these economists, the consumers are highly cautious while spending due to the ongoing slow income growth, concerns over falling house prices and high debt levels. The intense competition in the retail sector and the ongoing structural change is expected to put further pressure on margins and result in further change in the retail sector.

Wesfarmers’ Businesses Infected by Distress in Retail Sector

About Wesfarmers

One of Australia's largest listed companies, Wesfarmers Limited (ASX: WES) has diverse business operations cover including general merchandise, apparel, home improvement and outdoor living, businesses into chemicals, industrial and safety products, and energy and fertilisers.

The company’s Kmart Group consists of the Kmart and Target businesses. This group operates 531 stores across New Zealand and Australia and employs over 46,000 team members.

Trading Update – Kmart Group

Wesfarmers announced a trading update for the Kmart Group recently for the second half of the financial year. The company reported regarding the continuation of the lower level of sales growth into the second half of the 2019 financial year. The sales in Target in the second half has also been affected by the continued optimisation of the store network, informed the company.

Wesfarmers declared that the market conditions for Kmart and Target have remained very competitive during the second half to date, characterised by higher levels of promotional activity and increased price investment. The cautious consumer sentiment and these pricing levels are putting pressure on many industry participants.

During the second half to date, Kmart Group reported moderation in sales momentum; the total sales improved by 1.8 per cent in Kmart while reduced by 3.6 per cent in Target. Also, the comparable sales increased by 0.2 per cent in Kmart and decreased by 2.3 per cent in Target. The ongoing optimisation of the store network has affected the sales in Target, and its comparable sales data highlights that its current offer needs ongoing repositioning.

In order to support future growth, Kmart has undertaken several initiatives to optimise store processes and product flow during the current financial year. Some of these modifications led to a temporary reduction in on-shelf availability. Wesfarmers has made good progress in addressing this issue, and it is most likely to be resolved by the end of the financial year. Kmart will also annualise the exit of the DVD category during the financial year.

For the 2019 financial year, the Earnings before interest and tax (EBIT) from continuing operations for Kmart Group is expected to stay between $515 million and $565 million, in contrast to EBIT of $631 million reported in the last financial year.

The Managing Director of Wesfarmers, Rob Scott, has assured of the continuation of investment in price leadership strategy and customer offer, delivering strong returns over the long term. He informed that the Kmart Group remains focussed on providing even greater quality, value and convenience for customers despite the below-expected trading performance of the Group.

1H FY19 Financial Results of Kmart Group

In February this year, Wesfarmers Limited announced its financial results for the half-year ending 31^st December 2018. The company reported a net profit after tax (NPAT) of $4,538 million during the period.

In order to reflect the transformation of both Kmart and Target from the traditional department store model, the company renamed its Department Stores division to the Kmart Group during the half-year period. The revenue of the Kmart Group improved 0.8 per cent to $4,639 million during the period.

The earnings for the division (excluding Kmart Tyre and Auto Service (KTAS)) were recorded at $383 million, which was 3.8 per cent less than the prior corresponding period (pcp). The increased store and supply chain expenses, weaker sales in apparel and lower growth in non-seasonal products contributed towards the decline in Kmart’s earnings relative to pcp. The divisional earnings of the Group were $393 million for the half, including earnings from KTAS for the period of ownership until November 1^st, 2018.

Kmart’s Performance: The sales in Kmart were up 1.0 per cent, with a modest decline in comparable sales. The fall in comparable sales was due to the lower growth in non-seasonal products, underperformance in apparel and exit from DVD category.

Target’s Performance: An Improved quality of sales mix and growth was achieved in the womenswear segment. Improved availability and increased rates of customer conversion led to a good momentum and sales growth in the online proposition.

Wesfarmers Acquires Catch Group

To help boost Kmart and Target’s e-retailing capabilities, Wesfarmers recently announced the acquisition of Australian online retailer Catch Group Holdings Limited for a cash consideration of $230 million. According to the Managing Director of Kmart Group, Ian Bailey, the company wants to leverage Catch Group’s e-commerce and e-retailing capabilities to drive its brands’ digital sales and reduce its cost.

Outlook of the Kmart Group

Kmart is committed to doing its best to continue to grow its market share, informed Mr Bailey during a presentation to investors last week, on Thursday. Kmart has promised to cut its prices, and Target will change its product range more radically to stay on top of the competition.

Let us have a look at the highlights of Kmart Group’s future outlook mentioned in the business presentation:

• Focussing on strong returns in the long-term.
• Acceleration of digital capability to drive sales & reduce costs.
• Extend sourcing capabilities for the improvement of products and reduction of costs.
• Continuous efforts to drive growth in Kmart.
• Leveraging the Kmart Group structures for reducing the operating costs to mitigate the expected exchange rate & labour rate increases.
• Repositioning of the Target business building on the turnaround work done to date.
• Optimising the store network in Kmart & Target.
• Continuing to develop and implement strategies that respect & care for our people & planet.

Stock Performance: WES is trading at AUD 36.340 (As at 2:12 PM AEST, 18 June 2019), up by 1.57 with a market capitalisation of AUD 40.57 billion. Looking at its past performance, the stock has delivered a return of 129.88 per cent return since it commenced trading on the ASX. Also, the stock has generated a return of 16.72 per cent on a YTD basis.

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