June 12, 2019 / 10:36 PM / 3 months ago

Australia's Wesfarmers sees Kmart earnings drop in economic warning sign

SYDNEY (Reuters) - Australian conglomerate Wesfarmers Ltd forecast falling annual earnings at its Kmart discount department stores for the first time in a decade on Thursday, as a spending slowdown sounds an ominous warning for Australia’s sputtering economy.

It is the latest in a string of downgrades at consumer-facing firms and even deep discounting at the country’s biggest cut-price retailer failed to keep the checkouts churning as stagnant wage growth and a property downturn spooked shoppers.

Kmart’s same-store sales were on track to post a full-year drop and earnings would fall by 10% to 18% said Wesfarmers, which is now far more exposed to discretionary spending since it spun out supermarket chain Coles Group Ltd.

“The near-term economic environment does present some challenges,” Wesfarmers Managing Director Rob Scott told investors at a strategy day in Sydney on Thursday.

“We’ve seen Australia’s economic growth slow, as has consumer spending over the last six-to-nine months. The decline in house prices particularly in Sydney and Melbourne and the cost of living pressures have obviously weighed on consumers.”

After a weak first half, it also suggests a sparkling period of growth at Kmart may be over, sending shares on their sharpest decline in almost four months - a 4% fall in a rising broader market.

“Over the last few years they really reaped the benefits of really getting the consumer to spend,” Jun Bei Liu, a lead portfolio manager at Tribeca Investment Partners, which holds Wesfarmers stock but has been reducing its position.

“Discount department stores are meant to be the beneficiary of tough times, but it just goes to show that consumers think its very, very tough.”

The Australian economy grew at its slowest pace in a decade in the March quarter, with consumption particularly weak, leading the central bank to cut interest rates to a record low and to leave the door open to further easing in coming months.

DIGGING FOR GROWTH

Kmart’s forecast earnings drop also comes at an inopportune moment as the company overhauls its portfolio and searches for a new growth leg.

It is in the midst of an acquisitions spree, bidding to buy rare-earths producer Lynas Corp, while taking over lithium miner Kidman Resources Ltd and, on Wednesday, online retailer Catch Group Ltd.

But in the meantime that leaves it more exposed to Kmart which contributed a fifth of Wesfarmers’ earnings and a third of its revenue for the six months to Dec. 31.

Wesfarmers said Kmart earnings for the year to June 30, which include its other discount department store, Target, would fall to A$515 million to A$565 million ($357 million to $392 million), from A$631 million a year earlier.

The company also expects to close the Kidman deal by September, said it is still in the hunt for Lynas even as trade-war fears for supplies of the minerals it mines have driven its stock price above the Wesfarmers offer.

“Our interest in the company, and I guess the acquisition rationale, hasn’t really changed,” MD Scott said, adding the firm also remained open to other opportunities in the broader electric vehicles space.

Reporting by Tom Westbrook in Sydney and Shriya Ramakrishnan in Bengaluru; Editing by Richard Pullin and Christopher Cushing

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