'Not as planned': Kmart and Target stumble on slowing economy

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Discount department stores Kmart and Target have continued to trade below expectations this year, forcing them to downgrade their profit expectations amid a slump in consumer confidence and tougher competition from their resurgent rival, Big W.

Retail conglomerate Wesfarmers on Thursday said that Kmart's sales grew at just 0.2 per cent on a like-for-like basis from the start of January to May 22.

Kmart said it would cut prices to stay on top of competition.

Kmart said it would cut prices to stay on top of competition. Credit:SMH

That came after a 0.6 per cent fall in the first half of the financial year, taking trading in the year to date to a 0.2 per cent sales decline.

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 the company said highlighted that the struggling brand need a "repositioning".

Wesfarmers' shares fell 3.8 per cent in the first hour of trading after the announcement, which was made ahead of a company investor day in Sydney.  The group also owns Bunnings, Officeworks and an industrials division.

“The last 12 months have not played out as planned," Ian Bailey, managing director of the Kmart Group, which oversees both chains, told the investor meeting.

"Overall there is a subdued economic environment, with customers becoming increasingly selective in their purchases.

“Some everyday prices in the market are at incredibly low levels and in my view are not sustainable over time for many retailers."

Despite the competition, Mr Bailey said Kmart - which has delivered exceptional growth and returns in recent years - would cut prices to "vigorously" defend its position and keep growing its market share.

Wesfarmers said it now expects earnings 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.

Mr Bailey said Target had "not held up" under the current market conditions, and was in the process of changing its product offerings. The chain has shut 14 stores so far this financial year, with four more closures slated for this calendar year.

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.

On Wednesday, Wesfarmers revealed a deal to buy the local online retailer Catch Group for $230 million. The e-commerce group will join its Kmart division to help its department stores improve their digital offerings, it said.