Wesfarmers has downgraded profit forecasts for Kmart and Target. Picture: iStock
Wesfarmers has downgraded profit forecasts for Kmart and Target. Picture: iStock

Kmart’s huge $103m headache revealed

There's no doubt Aussies are obsessed with Kmart - but newly released figures reveal a major challenge facing the beloved retailer.

Earlier today, parent company Wesfarmers announced full-year earnings for its Kmart Group - which includes the Target and Kmart chains - were likely to drop by as much as $103 million.

That staggering loss is the result of declining sales at long-suffering Target, and sluggish ones at former star performer Kmart.

It means the department stores' full-year earnings are now tipped to hover somewhere between $515 million and $565 million - representing a possible 17 per cent decrease on last year's healthy $618 million.

Between January and May, Target's comparable sales dropped by 2.3 per cent, while Kmart's like-for-like sales grew by just 0.2 per cent.

The figures reveal a serious problem facing Kmart Group. Picture: News Corp
The figures reveal a serious problem facing Kmart Group. Picture: News Corp

While the full-year results won't be officially revealed until late August, Wesfarmers said in a statement Target's current offer "requires ongoing repositioning".

But managing director Rob Scott said he was still optimistic in the face of that bleak result.

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

$200 MILLION PAYDAY

While earnings have taken a dive, Wesfarmers has also dropped more than $230 million to acquire online retailer Catch Group, which will be brought into the Kmart Group's stable.

The surprise announcement was made yesterday, and it is hoped the deal will ultimately boost Kmart and Target's online sales.

It is also expected to lead to an expansion of products sold by Wesfarmers, and to grow its overall customer base.

"This acquisition represents an opportunity to accelerate Wesfarmers and Kmart Group's digital and e-commerce capabilities whilst continuing to invest in the unique customer and supplier proposition provided by Catch Group," Wesfarmers managing director Rob Scott said.

Catch Group, which owns a range of popular online businesses such as Scoopon, GroceryRun, Mumgo, Pumpkin Patch and CatchOfTheDay, will remain a separate entity under the deal, although Kmart Group managing director Ian Bailey will oversee it.

"We are excited to work with the Catch team and look forward to leveraging our capabilities to grow the business and accelerate the customer-driven, omni- channel initiatives across Kmart and Target," Mr Bailey said.

Queensland University of Technology associate professor and retail expert Gary Mortimer told news.com.au he expected more major acquisitions of "complementary businesses" to follow.

"Catch Group comes with 1.4 million active customers, so they're effectively buying customers," he said.

"It means that in future, you might see ladies underwear in Kmart, and then for 25 per cent off at Catch Group next week."

Dr Mortimer said Wesfarmers would be hoping to tap into the "convenience factor" which would allow Catch customers to shop online for Kmart and Target products - without making new, separate accounts for those retailers.

TROUBLED TIMES

Of course, today's results are just the latest in a string of blows to hit struggling Target.

Last February, Wesfarmers announced the company had recorded a "non-cash impairment" of $300 million due to Target's lacklustre sales.

In a media conference at the time, Mr Scott confirmed some Target stores could disappear in Australia under the company's new "agnostic approach", which meant unprofitable Target stores could be converted into Kmarts if it was in the best interests of the wider company - although he ruled out the possibility of a complete merger.

Later that year, Wesfarmers revealed the number of Target stores would be reduced by 20 per cent by 2023.

According to Australian retail experts, Target's performance has been affected by its lack of identity and competition with Kmart, as well as an overall weak retail climate and increased competition.

Many Target stores across the country will be closed by 2023. Picture: iStock
Many Target stores across the country will be closed by 2023. Picture: iStock

Meanwhile, Kmart has also attracted some backlash due to its controversial new layout which has seen cash registers gradually moved into the centre of stores.

Wesfarmers also said this week that changes within Kmart had caused a temporary shortage of items in-store, although it claimed "good progress has been made to address this issue" and that the problem should be "largely resolved by the end of the financial year".

UNCERTAIN FUTURES

Dr Mortimer told news.com.au Kmart's results weren't necessarily a problem for the company, but that Target was a different story altogether.

"It would appear that after several years of consistently strong growth, Kmart is moving into a period of market maturity," he said.

"Target remains an issue for the Wesfarmers group, despite significant changes to product ranges and investment in price.

"There remains a healthy level of cannibalisation between Kmart and Target, which questions the strategy behind running two differently-branded discount department store businesses essentially serving the same market."

He said Big W would likely pose a considerable threat to both retailers in future.

"As the Woolworths Group cuts their losses on unprofitable Big W stores and revitalises this division, I feel the discount department store sector will become highly competitive and a more challenging environment for the Kmart and Target businesses," he said.

"As Woolworths commences the closure of up to 30 Big W stores over the coming three years, I think it will change the landscape.

"Things will become more competitive because Woolworths will remove its loss-making stores which mean it will have a smaller Big W fleet, but a profitable division."

The Kmart Group includes the Kmart and Target businesses and operates 531 stores across Australia and New Zealand and employs more than 46,000 team members.

Continue the conversation @carey_alexis | alexis.carey@news.com.au


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