Australian retail sales for September 2023 rose 2.1%. The additional detail on volumes highlights the magnitude of the weakness more clearly. In the September 2023 quarter, retail volumes fell by 1.8% and on a per capita basis were down 4.3%. The volume reset is a necessary step in the retail cycle reflecting outsized volumes during COVID-19 and weaker income growth. We are approaching a trough in retail sales growth in our view, but we don’t see any meaningful recovery until late 2024.

Domino’s trading update revealed that sales trends have softened in Europe and remain negative in Japan. Sales are solid in Australia/NZ. The company emphasised earnings are recovering, but the qualifier is that 1H24e EBIT is likely to be down year-on-year. Domino’s is focused on improving franchisee profitability.

Endeavour reported group sales growth of 2.1% in 1Q24. The underlying trends were similar for both the Retail and Hotels division and we expect growth to remain near this rate over the remainder of FY24e. In Retail, the company’s revenue growth is catching up to market growth, but industry-wide volumes are in decline. In Hotels, the company is stepping back from acquisitions, focusing more on renewals and redevelopments.

Treasury Wines has announced the acquisition of DAOU Vineyards. This deal highlights a dramatic shift over the past four years by Treasury from a commercial to luxury wine player in the US market. The deal is returns dilutive initially and slightly EPS accretive. The cost synergies look very plausible and additional distribution reach highly likely, making the deal slightly value accretive over three years.

Inghams provided a trading update for 1H24 suggesting EBITDA pre AASB-16 is on track to rise 67% for the half. The company has seen improved volumes and some cost pressures have eased. Given prices are trending up 10% for its poultry, Inghams is seeing meaningful margin recovery. The company is on track to return to 8%+ EBITDA margins this year, which is just below pre COVID-19 levels of 8.5%. We lift our EBITDA forecasts by 23% in FY24e and 10% in FY25e. The unknown is where margins peak. Past investments have been made to improve operational efficiency, but the magnitude of price rises may mean EBITDA dollars are much higher than pre COVID-19 but percentage margins less so.

Harvey Norman provided a trading update informing the market that sales are in decline, profit is down almost 50% so far and it will consider buying back shares. Harvey Norman is undergoing a rapid reset of earnings post COVID-19. The concern on our mind is the loss of market share in Australia and NZ over the past four years. The unknown is how much of its weaker sales and earnings is a function of excess inventory. Earnings are likely to trough this year, but the recovery may underwhelm, particularly as its retail property is revalued lower.

Woolworths 1Q24 sales revealed good growth in its Australian Food division but weak results in NZ and Big W. Woolworths Food division is the driver of group earnings and valuation and is likely to see a further moderation in sales trends over the next year. There is a risk that the positive mix effect on sales unwinds as consumers react to higher prices and income growth is squeezed.

Super Retail Group provided a trading update to mid-October 2023 which revealed sales conditions improved slightly and gross margins are steady. The downturn in retail sales is proving orderly and predictable for many retailers. Super Retail’s net cash position provides the option to pay out another special dividend.

The link provides a presentation associated with a webinar we held. The webinar addressed the updated outlook for retail spending in FY24e and beyond. We are approaching the trough in retail spending in Australia. In the presentation, we address the shape of the retail cycle and how various categories may perform. The ability of households to drawdown on savings has helped cushion retail spending and housing indicators are starting to stabilise, which will help the sector. We also outline the challenges retailers face including higher wages and rents in the presentation.

Coles reported 1Q24 sales growth of 4.7% from its Supermarket division and 1.8% for Liquor. While Coles results were weaker than Woolworths, underlying trends remain quite similar and the growth gap is likely to remain small. The challenge for Coles is that sales growth is likely to be below underlying cost growth, putting an emphasis on cost savings to protect margins.