Kmart has promised to cut prices to fend off a resurgent Big W, and its sister brand Target will more radically change its product range, after they delivered worse-than-expected trading in the face of a softening economy.
"The last 12 months have not played out as planned," said Ian Bailey, managing director of retail conglomerate Wesfarmers' department store division, during a presentation to investors on Thursday.
Kmart's sales grew at just 0.2 per cent on a like-for-like basis from the start of January to May 22, which, after a 0.6 per cent fall in the first half of the financial year, brings it to a 0.2 per cent sales decline in the year to date.
Target's like-for-like sales went backwards by 2.3 per cent, bringing its year-to-date decline to 0.7 per cent, which Wesfarmers said highlighted that the struggling brand needed a "repositioning".
Wesfarmers said it now expected profit from Kmart and Target to be between $515 million and $565 million this financial year, which will be at least 10 per cent less than last year.
Kmart has delivered exceptional sales and earnings growth over the past 10 years, but Mr Bailey said customers were being cautious amid economic headwinds, and that other retailers were discounting to "incredibly low" and unsustainable levels.
Woolworths' discount department store Big W has been discounting heavily to win back customers, and grew sales by 7.4 per cent in the third quarter. However, it is still on track to lose at least $80 million this year.
Mr Bailey said Kmart would take the fight to competitors, and do its best to continue to grow is market share while waiting for the price war to blow over.
Wesfarmers on Thursday revealed Kmart has opened three stores under the name Anko in the US city Seattle, with another two to four to open there in the next six months.
The offshore experiment, in the home city of online retail behemoth Amazon, sells Kmart's private label products and was about trying to figure out "how to run a much more digitally enabled retail business".
In the new format it is using a digital back-end to stock fewer products on shelves at any one time, which gives it more flexibility in deploying stock and also enhances the appeal of products on shelves.
"If we get that right we can cascade elements of that back into our business here," Mr Bailey said.
Anko could also become a new retail format that Wesfarmers could open in new markets. Kmart already wholesales its home brand products to retailers in Thailand and Indonesia.
Wesfarmers said Target had "not held up" under the current market conditions, and was in the process of changing its product offerings to focus more on apparel, soft furnishings and toys.
The chain has shut 14 stores so far this financial year, with one more closure slated for this calendar year.
Target managing director Marina Joanou said it was clear its current format was not resonating with customers, with just over half Target's products accounting for 95 per cent of its gross margin dollars.
"The potential to clarify our proposition and simplify the business is immense," she said.
Shares in Wesfarmers, which also owns Bunnings, Officeworks and an industrials division, fell 5 per cent to $36.28 on Thursday.
Wesfarmers managing director Rob Scott said the company was optimistic that the end of the federal election, combined with interest rate cuts and the prospect of income tax cuts, would revive consumer confidence.
The conglomerate has been on an aquisition spree, this week buying online retailer Catch Group for $230 million, and earlier this year making a $776 million takeover bid for lithium miner Kidman Resources.
But Mr Scott said investors should not get "too carried away" by the rush of activity.
Wesfarmers acted on only a very small proportion of the acquisition opportunities it considered, and the size of its takeover bids were relatively small compared to the company's $46 billion market capitalisation, he said.
- SMH/The Age