Australian consumers appear to be in the mood to celebrate Christmas and retail spending is likely to be better than “feared” by many this year.The lead-up before Black Friday was soft, but Black Friday promotions stirred up demand and the ramp into Christmas is likely to be sufficient to lead to better than consensus outcomes. We see upside risk to earnings for 1H24e for Super Retail Group, City Chic, JB Hi-Fi and Wesfarmers. While near-term earnings upside exists, we remain cautious because the path over the next two years is challenging with sales growth likely to remain below cost growth.

We expect Bapcor is likely to experience further weakness in sales as the company cycles through elevated demand during COVID-19. The easing of price inflation and the recovery in new car sales are headwinds. We expect declining LFL sales for both its Trade and Retail divisions at Bapcor. Moreover, Bapcor has higher operating leverage given its fixed cost base. The cost saving program is weighted to 2H24e and will help to mitigate the earnings impact.

Australian national accounts for the September quarter reveals income growth of 2.6% and spending growth of 6.0%. Our analysis highlights that the weakness in retail spending is largely due to a reallocation by consumers away from retail as activities like travel and concerts returned to normal. Wages growth remains healthy and population growth of 2.4% is another partial offset to the pressure from higher interest rates and living costs on spending. The national accounts suggests we are more likely to see a soft landing for retailers and consumers. The weakness in retail demand is likely at its peak currently and should gradually improve through calendar 2024.

Endeavour Drinks Hotel Strategy Day highlighted a clear focus on efficiency at scale and refurbishment of its hotels. The business had lacked that focus under Woolworths ownership and the initiatives should lift earnings. Patience is required as the benefits will flow from FY26e onwards. The detailed financial scorecard disclosed by the company is also a big step forward in accountability. We still incorporate a risk to earnings from regulatory changes. While the exact form is not clear, on a 3-5 year horizon, there could be a hit to Hotel earnings.

Metcash reported a soft 1H24 result with sales up 1.3% and EBIT down 3.4%. The drop in EBIT was concentrated in the Hardware division and further margin pressure is likely given soft demand and rising operating costs. The Food segment has once again confounded sceptics by growing sales (ex tobacco) close to market growth and liquor is performing well. Metcash’s significant capex and acquisition outlays along with rising rates will lift finance costs over the next 18 months.

Australian retail sales for October 2023 rose 1.3%. Category variability continued with dining out resilient and weakness in furniture, electronics and recreational goods. Supermarkets slowed as fresh deflation dented sales. The expectation of Black Friday sales in November likely gave consumers a pause during October in some discretionary categories. Our feedback on November sales and Black Friday have been stronger.

Premier has provided an update on earnings for 1H24e ahead of its AGM. The decision to provide guidance that 1H24e EBIT will be near $200 million is unusual so early in the half and the lack of sales commentary makes it more difficult to gauge the drivers of the earnings change. EBIT of $200 million for 1H24e would be down 10% on the same time a year ago.

City Chic’s trading update showed that sales trends remain weak, but the company is rapidly clearing excess inventory. The sales declines are likely to ease by the end of calendar 2023. Gross margins could recover by 20 percentage points in 2H24e. City Chic’s past mistake of excess inventory is being corrected.

Inghams strategy day provided an upbeat tone about the opportunities to improve its sales mix and capex projects that will lift profit margins. The company is targeting double-digit EBITDA margins over time, which would be a 25% lift on our base case of 8%. Given a favourable industry structure, higher margins are possible.

Metcash has announced the put option on the remaining 15% of Total Tools Holdings was exercised. The rapid increase in valuation of Total Tools highlights what a well-timed acquisition it was. The initial 70% stake was at an enterprise value of $81 million and this final 15% is at an EV of $677 million. While relatively small, the accounting for Total Tools will result in 2.7% EPS dilution on our estimates from this additional stake. Metcash’s Hardware division accounts for 49% of our enterprise value and the success with Total Tools is a key plank of that. We have a Buy rating and $4.50 target price.