Australian retailers have had a decent Christmas in 2023, particularly compared with low expectations amongst retailers and investors. Supermarkets traded solidly and electronics demand improved from very weak levels. Liquor and apparel are still trending at very low rates of growth. There is consensus upgrade risk to retailers, particularly Harvey Norman and Super Retail Group. While sales trends are slightly better, the strength of gross margin is the most significant driver of better earnings. The retailer where feedback has shifted most positively is Harvey Norman.

This chart pack provides subscribers with insights about the retail operating environment and outlook for wages, floor space and profit margins. The chart pack has been compiled post the FY23 reporting season across the retail market providing fresh insights about the sector.

There is anticipation of weaker results for retail this upcoming reporting season. While the June-half has been tough, for many, it may be slightly better than consensus expectations. Inventory should be down and cash flow good. We are near consensus for FY23e for most stocks and call out Domino’s and Treasury Wines where there may be downgrades to FY24e earnings.

Australian retail sales data for December 2022 shows strong overall growth but increasing dispersion across categories. Both supermarkets and cafes & restaurants did well. Department stores also had a strong month. Household goods were weak, especially given the level of price inflation. Additional disclosure from ABS on volumes, shows that 80% of the strong December quarter for retail growth came from price inflation. The timeline of price inflation fading will have a significant bearing on the slowdown in retail in 2023 and adds to near-term risks in household goods but should result in stronger sales in food categories for this calendar year.

Australian retailers will deliver good results for the upcoming reporting season in February and March 2023, once again mystifying many that worry about higher interest rates. While reporting season will reveal impressive earnings for most, we are becoming more cautious. It may sound like a contradiction, but this set of results is likely a peak and earnings could fall meaningfully over the next 18 months as sales growth falls below cost growth.

PE ratios are depressed across consumer stocks reflecting concern about an earnings decline. However, bears will need to wait at least another six months for evidence. FY22e earnings are likely to surprise on the upside for just about all retailers, trading updates will be strong and inventory should be down on February levels. It’s less clear cut how stocks will react, but any downturn is unlikely to be evident.

Australian retail sales rose 12.2% year on year in June 2022. The three year compound annual growth rate for June was 7.8%, significantly above long term trends around 5%. Drilling down into categories, the strongest were cafes & restaurants and fashion. The only spot of weakness was fresh food specialists. In our view, retail sales will remain strong through the next four months lapping lockdowns from a year ago, with the first signs of weakness possible in November 2022. Retail sales are likely to be weak in 2023 given lower household income growth.

The February 2022 reporting season for retail, food and beverages is likely to show a wide dispersion in performance amongst companies. While sales trends have been good across the board, some have converted that to earnings better than others. We expect good results from household goods retailers like Harvey Norman but are below consensus on earnings for Domino’s and Endeavour Group. We expect stocks to be influenced by trading updates for January 2022 sales and commentary about price inflation and cost pressures. The full report provides a preview of major ASX-listed retailers potential earnings results.