Nick Scali’s AGM trading update revealed improving written sales order trends but highlighted the disconnect to recorded sales with 1H25e revenue for ANZ guided down 3%. Sea freight rate exposure has dented gross margins in the near term pushing 1H25e ANZ EBIT margins down to FY19 levels. The UK is set to reach profitability in 2H26e and saw gross margin improvement as new product is introduced to stores.

Australian wine export data for the September 2024 quarter shows another quarter of rebuild in China. China bottled wine volumes were 1.2 million cases.  The rest of world saw volumes down slightly, reflecting this reallocation.  Consistent with broader demand trends and Treasury’s strategy, the export data highlights that wines over $20 per bottle are performing well, while other price segments are softer. We expect Treasury to have a solid FY25e year given higher prices for its luxury wine.

Metcash provided a trading update indicating 1H25e underlying NPAT will be between $132-$135 million. The key driver has been the decline in sales and negative operating leverage in Metcash’s IHG hardware stores. Tough conditions are likely to prevail in 2H25e as well, albeit we are at a low point in the building cycle, providing scope for margin recovery at some point.

Premier Investments and Myer today confirmed the proposal to merge Premier Apparel Brands and Myer. Premier shareholders will receive 7.2 Myer shares at a post synergies 13.0x PE valuation. Premier Investments retains high margin Peter Alexander and Smiggle and an investment in Breville.

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.

Woolworths reported better 1Q25 sales trends compared with recent quarters. However, the company has increased its price investment to achieve the better sales result. This price investment is likely to continue and will weigh on profit margins in FY25e with a gradual recovery requiring a cost focus beyond that year in our view. There is a risk that the discounting incites a response. Big W and NZ have had better sales growth in 1Q25 as well, but margin recovery will be years away.

Australian retail sales rose 0.9% in September 2024 year-on-year. This was a deceleration on the 4.0% growth in August. August benefited from Father’s Day timing and promotional activity, which took sales from September. Looking at the September quarter, retail sales were up 2.5% compared long-term trends of 4.9%. Pharmacy, recreational goods and furniture were the non-food categories in growth during September. We see consumers delaying purchases in anticipation of Black Friday deals which means a more subdued October as well.

Australian inflation data for the September 2024 quarter shows that inflation is coming down. Living cost pressures are easing thanks to government support, lower petrol prices, as well as lower retail inflation. However, the challenge for retail is lower price inflation may result in lower revenue growth at a time when operating costs such as wages and rents remain elevated. In supermarkets, price inflation has been propped up by fruit, vegetable and tobacco prices. In non-food retail, there is deflation in electronics, furniture, sporting goods and footwear. Electronics, furniture and auto parts could see lower inflation in future if the outsized price inflation of the past five years partly unwinds. We expect lower retail price inflation to be a headwind for the retail sales recovery, even as volumes improve over the next year.

Coles (31 October) and Woolworths (30 October) 1Q25 sales results are likely to reflect a small improvement in industry growth with a slight edge for Coles in terms of supermarket growth rate.  We forecast Coles comparable sales growth of 2.6% and Woolworths at 2.1%. The bigger debate is whether industry growth will improve further given supermarket volumes remain sluggish and whether the retailers face any limits on their ability to sustain profit margins as the ACCC Supermarket inquiry continues. We expect softer results from Coles and Woolworths’ other segments in 1Q25e.

The link provides a presentation associated with a webinar we held. The webinar addressed our updated outlook for retail sales and the drivers of a recovery in retail spending. In the presentation, we answer the question of whether consumers will spend or save their income growth, quantifying the impact of rate cuts and tax cuts, which retail categories we expect to outperform in FY25e, and a comparison of Australia with offshore markets.