Endeavour Group’s 1Q25 result showed weaker retail sales trends and indications that gross margins are coming under pressure. The company said that Retail segment EBIT margins will fall by 50-100bp in 1H25e. We expect weak sales trends to persist a little longer, but the problem isn’t structural. The company has increased discounting to improve sales, which has hurt margins, but is yet to help sales.

The ACCC has approved the merger between Sigma and Chemist Warehouse. We expect the issuance of new shares to Chemist Warehouse will not be until February 2025 at the earliest and could be in March 2025. For a brief period, the stock could have a float-adjusted market cap of $14 billion. By April 2025, the market will increasingly turn its attention to the fundamental earnings and valuation drivers. The most compelling feature is strong revenue growth of circa 10-12%, with more than half from store count growth. The greatest unknown is where sustainable margins settle.

Domino’s recently announced that Don Meij, CEO of the company for the past 22 years, will retire. The Board announced the appointment of Mark van Dyck, as CEO. He is an executive with experience at Compass Group and within the Coca-Cola system. Mr van Dyck presented a sensible approach to improving profit margins, but it will take time as improving franchisee profitability is a first-order priority in our view. 

Coles will host an investor day on 14 November 2024. The company will showcase its major capital projects undertaken over the past five years. Witron distribution centres are impressive and Ocado may actually work. The debate in our mind is whether any competitive advantage has been built. We doubt it. Coles margins should “pop” in FY26e as the capital projects deliver and implementation costs drop. However, the medium-term growth is modest and risks remain around a higher intensity of competition along with challenges in growing market share.

The festive season is the key profit driver for almost all Australian retailers. Its shape has shifted meaningfully over the past decade as Australian shoppers have embraced Black Friday promotions. We expect an even bigger November sales period in 2024 as more retailers and consumers position for Black Friday deals. While November gets bigger, it has largely been at the expense of December sales. The timing of promotional events is also shifting a little and we may see promotions earlier in November this year. The primary risk for retailers is longer, deeper discounting impacting gross profit margins. 

Endeavour’s share price has dropped 10% in the past quarter. Our take is the share market is concerned about the outlook for liquor industry demand and the transition to a new CEO. We address the liquor industry outlook in this report and find that the weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. We expect retail liquor sales to improve meaningfully by June 2025 and support better earnings for Endeavour. 

Super Retail Group’s trading update for the first 16 weeks highlights a slight softening of sales trends and some increased pressure on gross profit margins. The increased competition in the auto market is of note given Supercheap Auto accounts for over half the group’s earnings and close to two-thirds of valuation. Repco is becoming more competitive in retail and Bunnings will expand in auto in the next six months. 

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.