Wesfarmers Ltd (ASX: WES) warned that slowing womenswear sales at Kmart, among things, would lead to a drop in profit at its department stores. The Wesfarmers share price is down 2% in early trade.
Wesfarmers is a 100-year-old conglomerate which at various times has owned and operated some of Australia’s largest retail brands such as Coles, Kmart, Target and more. Today, its largest business is Bunnings Warehouse, the number-one DIY home improvement business.
Wesfarmers Partial Profit Guidance
Total Kmart sales (excluding Kmart Tyre and Auto) increased by 1% during the December 2018 half year, which was negatively impacted by same-store sales declining by 0.6%.
Management blamed three things for Kmart’s disappointing performance in the key Christmas period: the exit of the low margin DVD category (which previously accounted for 1% of sales), weaker apparel sales – particularly womenswear, and finally growth in everyday products moderated compared to last year.
Wesfarmers’ other department store, Target, recorded total sales growth of 0.2% with same-store sales growing by 0.5%. The retail conglomerate said inventory levels at both Kmart and Target remained at “appropriate levels”.
Taking all of the above into account, Wesfarmers department store EBIT is expected to be between $385 million to $400 million for the December 2018 half-year result (click here to learn what EBITDA means). In the 2018 financial year, the EBIT for department stores was $415 million, although this included Kmart Tyre and Auto (KTAS) last year.
Wesfarmers Balance Sheet
Wesfarmers will report that net debt fell from $3.6 billion at 30 June 2018 to $0.3 billion at 31 December 2018. The retail conglomerate was able to achieve this through a number of sales:
The $670 million to $680 million gain on Bengalla, the $265 million to $275 million gain on KTAS, the US$98 million gain on its Quadrant Energy stake and the $2.1 billion to $2.3 billion gain of the demerger of Coles Group Ltd (ASX: COL). Wesfarmers will also report a $130 million to $150 million provision for the modernisation of the supply chain for Coles.
Our analyst recently wrote an in-depth analysis questioning if Coles shares were worth $12.
Managing Director of Wesfarmers Rob Scott said: “All our businesses continue to deliver a compelling offer to their customers and Wesfarmers enters the new calendar year with a strong balance sheet and operating businesses well positioned for the future.”
The official audited financial result will be reported on 21 February 2019.
Are Wesfarmers Shares A Buy?
It is good to see that Target has finally achieved sales growth, but it is worrying that Kmart’s sales were essentially flat. We also didn’t get any indication about what happened at the key Bunnings business.
One thing that could attract me into buying Wesfarmers shares is if it acquires a business outside of the retail space.
With the Australian economy seemingly slowing, I don’t think this is the best time to buy Wesfarmers shares. Coles Group was arguably the most defensive business in the Wesfarmers stable, but it’s now its own company on the ASX. I’d at least want to know how Bunnings is going in this environment of falling house prices before buying Wesfarmers shares.
I believe there are more reliable shares that could be chosen for a defensive portfolio, such as the ones named in our free report below.
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