The Wesfarmers Ltd (ASX: WES) share price is moving higher today despite the conglomerate noting the “significant impact of COVID-19 related disruptions” on its Kmart Group segment.
Wesfarmers operates six main divisions: Bunnings, Kmart Group, Officeworks, CEF (Chemicals, Energy and Fertilisers), Industrial & Safety and Other.
Pandemic reverses growth
Originally a COVID-19 beneficiary, Wesfarmers has seen its growth reverse as pandemic restrictions begin to bite.
The company expects to report a half-year net profit after tax (NPAT) of between $1.18 billion to $1.24 billion for the first-half result to December 31 2021.
The forecast is in line with market expectations.
At the mid-point of guidance, this represents a 13% fall on the $1.39 billion in NPAT achieved in the prior corresponding half.
HY21 report: Why I think Wesfarmers (ASX:WES) is one of the best ASX blue-chips
Bunnings and Wesfarmers Chemicals, Energy & Fertilisers divisions performed strongly, which was offset by Kmart Group (Kmart, Target, Catch.com) and Officeworks.
Kmart Group in particular was significantly impacted, losing almost 25% of its trading days to government-mandated store closures.
Full details of the first-half performance will be released on February 17.
Kmart Group weighs on group results
Trading restrictions and the closure of 62 Target stores meant Kmart Group sales fell 10.3% compared to the prior corresponding period.
Comparing this with the same period two years ago – which was unaffected by the pandemic – sales reduced 5.2%.
When restrictions eased, customer traffic remained impacted as transmission increased especially over Christmas.
To counter supply chain disruptions, Wesfarmers held additional domestic inventory.
However, due to staff shortages from stay at home orders, even when stock was available, distribution centres were unable to meet customer demand.
Combined earnings before tax for Kmart and Target is expected to be between $215 million to $223 million for the half.
“Higher costs during the half reflected commitments made to pay team members when no meaningful work was available during lockdowns, additional support to team members when required to isolate, rising international freight costs and costs associated with elevated domestic stock holdings”
On a positive note, online penetration increased to 14.3% for Kmart and 26.9% for Target.
Catch.com stagnates
Catch.com recorded a marginal 1% increase in transaction value for the half. During periods of lockdown demand increased. Conversely when restrictions eased purchases fell.
On a two-year basis, growth has nearly doubled.
Despite the increase, Catch.com expects to record a $43 million to $45 million earnings loss as the division invested in its team, technology, marketing and inventory.
My take
Wesfarmers noted that trading conditions remain “weakened” as the pandemic reduces both its available employee base and customer demand.
However, both are (hopefully) temporary speed bumps, which should see the return to more normalised levels in the second half.
Hence why the market reacted positively today, despite profit reversing.
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