Australian retail has had a difficult 2023 with below trend sales growth of 3.1%. We expect another challenging year with growth of 2.5% for 2024. While a weaker year, it will be a tale of two halves with softer growth in the January-June period and better growth for July-December. Moreover, we expect slowing sales in at-home food & liquor and a sharper slowdown in cafes, restaurants and takeaway food. We expect an improving rate of growth for non-food retail. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth.

We initiate coverage of footwear and apparel retailer Accent Group. The company has store rollout potential to grow by 240 stores in four years, or a 6.6% CAGR. Moreover, the evolving product mix contributes to higher gross margins as more vertically sourced product and more higher margin apparel goods are sold. However, the company is facing rising cost of doing business coupled with a period of slowing same store sales which puts pressure on margins in FY24e. The store network growth potential and gross margin gains will help lift margins in FY25e and more so in FY26e.

Super Retail Group provided a trading update highlighting that sales held up relatively well in 1H24 and gross margins were up slightly. Like many retailers, gross margins are proving to be a cushion to the weakness in sales and elevated cost growth. We lift our EPS forecasts by 7% in FY24e and 3% in FY25e. While a positive update, we expect sales trends to be soft from here and cost growth will outstrip sales growth for two consecutive years.

Australian retail sales for November rose 2.1%. Black Friday promotions drove improvements particularly in electronics, department stores and furniture. Online food and non-food were both positive, with online food strength growing double-digits. While there are concerns about a pull forward of sales into November, our feedback suggests December sales held up reasonably well.

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.

Retail prices have risen substantially over the past three years in Australia, and surprisingly there has been little damage to volumes. In Issue 7 of Price Watch, we assess the relative price movements in retail. Retail price inflation has generally only tracked broader inflation and therefore its relative affordability remains good. Moreover, our analysis across many large retailers reveals they have been meticulous in ensuring price relativities between brands and private labels have been held. Even with sensible measures on price, retailers should brace for a consumer that will increasingly substitute to different pack sizes, brands or even delay their purchase. These behaviours tend to build over time in both food and non-food retail categories.

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.