Wesfarmers Ltd (ASX: WES) has released a trading update for the Kmart Group, is it a buy?

Wesfarmers is a 100 year-old conglomerate which at various times has owned and operated some of Australia’s largest retail brands such as Kmart, Target and more. Today, its largest business is Bunnings Warehouse, the number-one DIY home improvement business.

Wesfarmers Kmart Group Trading Update

Kmart Group consists of Kmart and Target. At the half year result we heard that trading conditions were difficult and that has continued into the second half.

Kmart’s total sales were 1.8% higher in the 22 weeks to May 2019 with comparable sales growth of 0.2%. For the financial year to date Kmart has delivered total sales growth of 1.3% and a comparable sales decline of 0.2%.

In the second half of 2019 to May 2019, Target’s total sales dropped 3.6% with a comparable sales decline of 2.3%. That means, year to date, Target’s sales are down 1.3% with comparable sales decline of 0.7%.

Wesfarmers said that market conditions remain very competitive with reduced prices and higher levels of marketing. The cheaper prices, along with cautious consumer sentiment, is making the whole retail sector difficult.

The retail conglomerate also said that it is exiting the DVD category. Every bit of floor space is important, and more of us are watching movies online or streaming these days. The DVD section could be used for better uses.

Wesfarmers Managing Director Rob Scott said: “Kmart will continue to invest in its customer offer and price leadership strategy that has delivered strong returns over the long term.”

Profit Guidance

Due to the slowdown of sales growth and price competition, Wesfarmers thinks that Kmart Group’s FY19 EBIT (click here to learn what EBIT means) will fall in the range of $515 million to $565 million, which would represent a fall of 10.5% to 18.5%. This is quite a wide range considering we’re in the last month of the year.

The Wesfarmers share price is down almost 4% in early trading in reaction to this news. With Wesfarmers trading near a high, I don’t think it’s worth buying at today’s price if retail is becoming tougher.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.