Wesfarmers share price on watch after Kmart Group trading update

The Wesfarmers Ltd (ASX:WES) share price could head lower this morning after it released an update on its Kmart Group business…

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The Wesfarmers Ltd (ASX: WES) share price will be on watch on Thursday following the release of an update on the performance of its Kmart Group division this morning.

What was announced?

According to the release, for the 22 weeks to May 31, the Kmart Group has continued to experience lower than expected levels of sales growth.

During the five months the Kmart business (excluding the Kmart Tyre and Auto business) reported total sales growth of 1.8% and comparable sales growth of 0.2% over the prior corresponding period. This means that year to date Kmart total sales are up 1.3% and comparable sales are down 0.2%.

After a promising first half, the Target business has experienced a reasonable deterioration in its performance. During the five months to May 31, Target has seen its total sales fall 3.6% and comparable sales decline 2.3% over the prior corresponding period. This means that year to date, Target total sales are down 1.3% and comparable sales have decline 0.7%.

Management advised that this has been driven by market conditions for Kmart and Target remaining very competitive with increased price investment and higher levels of promotional activity. In addition to this, it notes that cautious consumer sentiment is placing pressure on many industry participants.

The company also blamed some of Kmart's soft sales on the implementation of a number of initiatives to optimise product flow and store processes to support its future growth. Some of these changes resulted in a temporary reduction in on-shelf availability.

However, good progress has been made to address this issue and it is expected to be largely resolved by the end of the financial year.

Earnings expected to decline.

Unfortunately, the increase in price competition has had a negative impact on the margins of both Kmart and Target.

In light of this and the moderation in sales momentum, earnings before interest and tax from continuing operations for Kmart Group are now expected to be between $515 million and $565 million in FY 2019. This will be a decline of 10.5% to 18.4% on the $631 million achieved in FY 2018.

Wesfarmers managing director, Rob Scott, acknowledged that Kmart Group is underperforming, but advised that it will continue to focus on delivering even greater value, quality and convenience for customers, including through increased investment in online and other digital initiatives.

He said: "Kmart will continue to invest in its customer offer and price leadership strategy that has delivered strong returns over the long term."

In addition to the Wesfarmers share price, it may be worth keeping an eye on rival Woolworths Group Ltd (ASX: WOW) today as the market may believe the issues impacting Kmart Group could be taking a toll on its Big W business.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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