Cost-conscious consumers have been flocking to Kmart for bargains, propelling its broader business division to record earnings last financial year.
"We've actually seen an increase in customer numbers within Kmart," Wesfarmers managing director Rob Scott said on Friday after the retail and industrial conglomerate posted better-than-expected full-year earnings.
"What we're seeing is that as people become more value-conscious, and also as the quality of Kmart's products improve, we're actually attracting a lot of new shoppers to Kmart," Mr Scott said.
Customers who might have only bought home products at Kmart were now purchasing fashion apparel, its Anko-branded activewear and health and beauty products.
Same-store sales were up 14.5 per cent for Kmart stores for the 12 months to June 30, with total sales for Kmart Group - which includes Target - up 16.5 per cent to $10.6 billion.
Target's same-store sales dipped 0.5 per cent in 2022/23, with stronger performance in apparel offset by challenging trading in homes and toys.
Kmart Group's earnings before tax soared 52.3 per cent to $769 million, a record for the business.
Overall, Wesfarmers - which includes Bunnings, Officeworks and several other divisions - posted a $2.5 billion full-year net profit, up 4.8 per cent from 2021/22.
Revenue grew 18.2 per cent to $43.6 billion, with earnings before interest and tax up 6.3 per cent to $3.7 billion.
E&P Capital retail analyst Phillip Kimber said it was a good result for Wesfarmers, with better-than-expected earnings from Bunnings, Kmart Group and WesCEF, its portfolio of chemical, energy and fertiliser businesses.
Ian Chitterer, vice president of Moody’s Investors Service, said the strong performance highlighted the strength of Wesfarmers' market-leading portfolio of businesses.
"We thus consider that Wesfarmers will remain well positioned despite the uncertain economic environment," he said.
Bunnings' revenue was up 4.4 per cent to $18.5 billion, with earnings rising 1.2 per cent to $2.2 billion, as strong demand from commercial customers was partially offset by lower consumer sales.
While consumers were more cautious in the second half about making big-ticket purchases and commencing larger do-it-yourself projects, they continued buying necessities and smaller-scale DIY home improvement projects.
Catch, the e-commerce business that Wesfarmers acquired in 2019 for $230 million, incurred a $163 million loss which was worse than the $88 million loss the year before.
"In the past four years, we've seen a fundamental change in the market dynamics around e-commerce," Mr Scott said.
Wesfarmers' brick-and-mortar retail brands generated $1.4 billion in e-commerce sales in 2022/23, about double what Catch had.
"We've learnt a lot from Catch, but the reality is that it's very difficult in today's market to have a profitable and scalable pure e-commerce retailer," Mr Scott said.
Wesfarmers is planning to scale down Catch's product range to hopefully eventually make it profitable - although the company is still expecting a loss in 2023/24 - while doubling down on the e-commerce capabilities of its other brands.
While Coles this week flagged that it had been the victim of organised shoplifting rings, Mr Scott said Wesfarmers had only seen stock losses return to 'normal' levels following the pandemic.
He was more concerned about a rise in customers abusing staff.
"We're really focused on the safety of our team - so there are various strategies that we've employed to try protect our team and reduce the incidence of customer threatening situations."
For the first seven weeks of 2023/24, sales growth moderated for Kmart Group but remained steady for Bunnings.
Kmart Group plans to continue integrating Kmart and Target stores into one operating model over two brands in the first half of 2024, with Target getting select Anko products early in the new year.
Wesfarmers will pay a fully franked dividend of $1.03 per share, bringing its total dividend for the year to $1.91, up 6.1 per cent from the previous year.
In afternoon trading, Wesfarmers shares were up 2.7 per cent to $50.77.
