Wesfarmers shares rose sharply yesterday despite a trading update that revealed a substantial downgrade for December half sales growth and profits as Covid Omicron took a toll on sales in two key chains – Kmart and Officeworks.
While the update revealed that the company has had a difficult period, it was still broadly in line with what the market was expecting, hence the price bounce.
The shares ended the day up 2.9% at $55.58.
Wesfarmers’ update won’t be the only one with this sort of mixed news from a retailer, especially about a weak the start to the June half year.
According to the ASX statement, Wesfarmers expects to deliver an interim net profit after tax for the December half in line with current consensus expectations at between $1.180 and $1.240 billion.
This represents a decline of 12.5% to 16.5% over the prior corresponding period’s net profit after tax of $1.414 billion.
Wesfarmers said that the forecasts reflect pleasing results from its Bunnings and Wesfarmers Chemicals, Energy & Fertilisers business, which partially offset weak results from Kmart Group and Officeworks.
The latter businesses were impacted by COVID-related disruptions and costs, as Wesfarmers explained.
“Ongoing global supply chain disruptions were well-managed during the period as a result of investments made to hold additional inventory domestically, but high levels of Covid-related absenteeism in New South Wales and Victorian distribution centres impacted the ability to deliver stock to stores,” Wesfarmers said.
“Trading conditions improved as restrictions eased during the second quarter of the 2022 financial year, but customer traffic to stores was impacted by rising community transmission of COVID-19 in some states, particularly during the Christmas trading period.
“Ongoing global supply chain disruptions were well managed during the period as a result of investments made to hold additional inventory domestically, but high levels of COVID-related absenteeism in New South Wales and Victorian distribution centres impacted the ability to deliver stock to stores in line with customer demand.”
The main drag on the company’s performance during the first half was its Kmart Group business.
This was due to a 10.3% decline in Kmart and Target sales and just 1% sales growth from its Catch online business.
Kmart and Target were significantly impacted by COVID-19 restrictions, with almost 25% of store trading days lost due to government-mandated closures in the half – thanks to the lockdowns in NSW, Victoria and the ACT, and for shorter periods in some other states and Territories.
This led to combined half year earnings before tax (EBT) for Kmart and Target falling to between $215 million and $223 million.
Things were even worse for the Catch business, which is expecting to post a loss of between $45 million and $43 million for the half.
As a result, the Kmart Group business is expected to see its first half EBT more than halve to between $170 million and $180 million from $487 million a year earlier.
“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.
“In addition, the rapid temporary shift to online channels during lockdowns, combined with reduced team member availability, also impacted productivity and profitability during the period,” the company explained.
The rise in Omicron cases has seen retail trading conditions weaken in the last two weeks of the 2021 and customer traffic to stores has remained subdued during the first half of January.
Further details will be provided to the market next month with the release of its audited half year results in February.
