Retail giant warns on Omicron sales impact

RETAIL investors can brace for more “soft” trading updates from listed companies as $63bn giant Wesfarmers kicked off the Omicron pre-results impact series on Monday by flagging a hit to “productivity and profitability”.

The Wesfarmers update came as market analysts labelled the next two weeks a “critical period” for retailers.

The Bunnings Warehouse, Kmart and Target retail chains owner, which has also built up a 19.3 per cent stake in Australian Pharmaceutical Industries ahead of a $763.6m takeover, will meet consensus forecasts for a $1.18bn to $1.24bn profit for the six months ended December 31.

But it was the “pleasing results” in its popular hardware group Bunnings and its chemicals, energy and fertilisers businesses that helped offset wider pandemic disruptions and costs at its Kmart Group and Officeworks operations, which bore the brunt of the spread of Omicron.

The rebound – experienced after lockdowns and restrictions came off, especially in NSW and Victoria, and from open borders in the lead-up to Christmas – has been dampened as the nation awaits a peak in Omicron cases.

Trading conditions for Wesfarmers weakened in the last two weeks of the 2021 calendar year, and customer traffic to stores was subdued in the first half of January.

Staff absences due to the spread of Omicron have placed additional pressure on distribution centres and stores in some states, necessitating a reduction of trading hours in some outlets and impacting supply chain productivity and stock availability.

“These issues are expected to persist while Covid-19 cases and the number of team members requiring to isolate remain elevated,” Wesfarmers told investors on Monday.

Combined Kmart and Target sales fell 10.3 per cent for the first half and declined 5.2 per cent on a two-year basis.

Combined earnings before tax for both are expected to be between $215m and $223m for the half, a substantial drop from the $487m for the same period last year.

Wesfarmers’ update came after equities research analysts at Macquarie declared the next two weeks a “critical period” for retailers.

Companies with a higher inventory turn are at most risk of disruption, Macquarie said.

KFC chain operator Collins Foods, pizza group Domino’s and supermarket giant Coles were most likely to release “negative trading updates in coming weeks if current supply chain issues persist”.

“As management teams return from the summer break, we expect a higher-than-normal risk of pre-result trading updates to point toward current post-Christmas softness,” Macquarie’s note stated.