Wesfarmers says full-year earnings from its department stores could fall by as much as $103 million after sales at the struggling Target chain fell by 2.3 per cent so far in the second half.
The Perth-based conglomerate, which reports its full-year results on August 27, says Target’s comparable sales for the five months to May fell 2.3 per cent on the prior corresponding period and by 0.7 per cent over the year so far.
Although sales at stablemate Kmart have stabilised in the second half, Target dragged down the unit as a whole and Wesfarmers says the latter’s “current offer requires ongoing repositioning” despite continued efforts to turn around the chain.
Combined full-year earnings from two stores’ continuing operations are now expected to be between $515 million and $565 million, as much as 17 per cent down on last year’s $618 million.
Wesfarmers managing director Rob Scott says the Kmart Group’s second-half performance had been disappointing, but that it would benefit from increased investment in online and digital initiatives.
The company said on Thursday it was feeling the pressure from increased pricing competition and cautious consumer sentiment, and admitted various changes at Kmart had also resulted in a temporary shortage of goods on shelves.
Mr Scott told investors in a separate briefing there had been no notable lift in consumer sentiment after the May federal election, though the onset of colder weather had been welcome boost for sales.
“The seasonal changeover is a key driver of sales… (so) the cold weather has been helpful (even if) some of the cold weather took a while to arrive,” Mr Scott said.
Wesfarmers announced in June last year it was scaling back its Target business, cutting the size or number of stores in the chain to achieve a 20 per cent overall reduction in footprint by 2023.
Mr Scott said on Thursday the repositioning of the department store network, which will include the introduction of more Kmart stores, had allowed its chains to compliment each other instead of competing for space and customers
Mr Scott told investors he expected further improvement after Kmart finishes cycling out DVD sales.
Wesfarmers’ first-half profit soared to $4.5 billion from $212 million in the prior corresponding period due to $3 billion in one-off items following the demerger of supermarket Coles, and the sale of Bengalla, Kmart Tyre and Auto Service, and Quadrant Energy.
The conglomerate has since embarked on a number of acquisitions, including a $776 move for lithium developer Kidman Resources, and a so-far unsuccessful approach for rare earths miner Lynas.
This week it continued its spending spree this week with the $230 million acquisition of online retailer Catch Group, which will be rolled into the Kmart Group.
Mr Scott told analysts the company felt “the time was right” to act on opportunities.
“On the acquisition side, I know we’ve announced a few things in recent months, but I think it’s important not to get too carried away by that activity,” he said.
“We’re talking a very very small proportion of out market capitalisation, and indeed capex.”
Mr Scott said the proposed investment in Kidman was grounded in long-term advantages.
“We don’t know what the long-term price of lithium is going to be …what we do know is that … (the proposed acquisition) is going to be one of the lowest-cost providers globally of lithium hydroxide,” Mr Scott said.
Shares in Wesfarmers were worth $38.25 before trade on Thursday and have climbed by 18.72 per cent, or $6.03, so far in 2019.
