Slowing Kmart sales growth drags down Wesfarmers shares

Slowing Kmart sales growth drags down Wesfarmers shares

Performance over the Christmas period was always going to be under the microscope for retailer Kmart, but backwards movement in its like-for-like sales has dented confidence in parent company Wesfarmers (ASX: WES).

In an announcement to the market today, Wesfarmers noted several causes behind the 0.6 per cent decline in Kmart sales for the first half of FY19.

The planned exit from the low margin DVD category that previously accounted for 1 per cent of sales had taken its toll, along with weaker sales in apparel categories - particularly in womenswear - and moderated growth in everyday products.

At 10:50am AEDT, WES shares were down 2.79 per cent at $31.06.

Kmart's total sales growth rose by a 1 per cent, compared to 3 per cent for the same time last year. This excludes sales from Kmart Tyre and Auto (KTAS), which it has offloaded and is likely to bring in gains of between $265-275 million. 

Meanwhile, results was more positive for another Wesfarmers subsidiary - Target.

"In Target, total sales increased by 0.2 per cent, with comparable sales increasing by 0.5 per cent, representing an improvement on the prior corresponding period. Pleasingly, inventory levels in both Kmart and Target remain at appropriate levels," the company said.

"The moderation in sales growth in Kmart is expected to result in earnings before interest and tax for Department Stores for the half-year ending 31 December 2018 between $385 million and $400 million, excluding the gain on disposal of KTAS.

The company is set to deliver its half-year results on 21 February, while Wesfarmers managing director Rob Scott believes overall performance continues to reflect the strength of a diverse portfolio of businesses and interests. 

"All of 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," says Scott.

The 1H results will taken into account several significant items including gains from the disposals of Bengalla ($670-680 million), Quadrant Energy (US$98 million) and the aforementioned sale of KTAS.

The most notable expected return however is an expected non-cash gain from the Coles demerger of between $2.1-2.3 billion, while provisions relating to the supply chain modernisation in Coles are set to have cost $130-150 million. 

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