Last financial year, the two brands posted earnings before interest and tax (EBIT) of $631 million. Scott said today they were expected to generate between $515 million and $565 million this financial year, or a fall in their earnings of between about 10 per cent and 18 per cent. Kmart has been one of Wesfarmers' shining lights. Credit:SMH While Kmart has been a retail powerhouse in the past, it isn’t immune from the context in which it operates. The broader retail environment is recessed – non-food retail sales were falling in the lead-up to the Federal election and the economy is growing at its weakest rate since the financial crisis. Scott said conditions were competitive and characterised by increased price investment and promotional activity. Apart from the weakness in consumer confidence and spending, it probably doesn’t help the Wesfarmers department store brands that their most direct competitor, Woolworths’ troubled Big W discount department store group, is sacrificing earnings to generate sales.

In the March quarter, the third quarter of its financial year, Big W lifted its comparable stores sales 7.4 per cent – but foreshadowed a loss of $80 million to $100 million for the full financial year. It has been discounting aggressively amid another major restructuring of a brand struggling for survival. Loading It isn’t only Big W, of course, that is struggling, and discounting to try to maintain sales. The sector is under pressure. National Australia Bank released its latest business survey today, describing the retail sector as ‘’clearly in recession.’’ For Wesfarmers, the impact of the tough conditions on its earnings is exacerbated by the fact that it directly sources the majority of the products in the department stores, which has exposed its cost base to the depreciation of the Australian dollar. It’s also had some issues in trying to cope with the enormous volumes of products that flow through its supply chain. It hasn’t been able to turn over its stock quickly enough to avoid indigestion and, in trying to respond to the issue, has had some problems with on-shelf availability of popular products.

Given its ambition of creating a model that can sell over a billion items, and an earnings strategy built around volume, fixing that stock flow issue is a critical one. Kmart’s Ian Bailey says progress is being made. For Wesfarmers, the near term hope for a turnaround in the performance of its department stores is that, with the election out of the way, the impact of the Reserve Bank’s rate cut to come and, possibly, the Morrison government’s tax cuts, consumer confidence and spending will pick up. Big W has been discounting aggressively to generate sales. Credit:Glenn Hunt If it doesn’t, given the centrality of consumption to economic growth, the RBA will probably have to cut rates even further and the federal government may have to think about what it can do beyond the tax cuts to provide some stimulus and maintain the country’s recession-free run of nearly three decades. Scott and Bailey can at least console themselves with the reality that their stores do generate sizeable profits – more than $500 million of EBIT a year – while others don’t.

It also helps that the brands are within a very large, highly profitable and reasonably diversified group with a big balance sheet. They have the luxury of being able to make longer term plans – and fund them – than most other retailers. Loading On Wednesday, Wesfarmers announced that it had acquired the Catch Group for $230 million to help boost Kmart and Target’s e-retailing capabilities. Bailey told the strategy briefing that it wasn’t that his businesses didn’t have a significant online presence but rather that Catch had particular capabilities in e-commerce and fulfilment as a result of its specialisation in online retailing. He wants to leverage those capabilities to drive his brands digital sales and reduce their cost. Acquisitions like Catch, or the three research and development stores Wesfarmers runs under its Anko wholesale brand in Seattle in the US, or the small army of data analysts it has recruited, underscore both the group’s commitment to department store retailing and the long term perspective it brings to its businesses.