Super Retail Group’s trading update showed very strong sales for the first 16 weeks of FY23e. Sales are elevated given lockdowns dragged down sales last year. Even so, the three-year average growth rates are high single-digit at least, reflecting strong consumer demand and higher prices. We expect sales to slow from here and are therefore fundamentally cautious on the stock.

JB Hi-Fi reported a very strong 1Q23 sales trading update, which was elevated given the period lapped lockdowns last year. The three-year average growth rates are mid to high single digits reflecting sustained consumer demand and support from both price inflation and mix. We expect sales momentum to slow in 2Q23e as the company laps a more normalised sales base. We forecast 2Q23e comp sales for JB Hi-Fi Australia at 4.4% and The Good Guys at 3.3%. Given we expect a sales slowdown from here, we are more cautious on the stock.

Coles Group reported 1Q23 sales growth of 1.3%. This is a low rate of growth, but an aberration compared with likely growth over the remainder of FY23e. The first quarter was lapping lockdowns. We expect Coles Supermarket comp sales growth to recover to 5.9% in 2Q23e and Liquor should recover to be almost flat. All of the sales growth over coming quarters will be price inflation with some modest volume declines.

Australian inflation for the September 2022 quarter was 7.3% with retail categories making a meaningful contribution to the price growth. Packaged grocery inflation was at its highest in more than 30 years. Retail inflation is starting to move above the sweet spot in our view. The magnitude of inflation will start negatively impacting volumes. This is more likely the risk in supermarkets, furniture and auto parts. Nevertheless, overall retail sales will continue to be propped up by price inflation over the next 12 months.

Over the next six weeks a number of retailers will provide updates on their trading. We expect to see incredibly strong sales for most non-food retailers. September sales growth could be north of 20% and October could be up low double-digits. Supermarkets have seen slower sales recently, but should see an acceleration starting to show through in October. November could be a speed bump given enormous growth rates in 2020 and 2021. However, Black Friday promotions may start earlier and more retailers are likely to participate. We also expect a solid December trading period across the retail sector.

Costa has had a tough year. However, we think the worst of its issues are transitory. There are risks given the recent CEO departure. However, the company’s recent trading update has cleared the air on citrus and its mushroom site tour in South Australia provides a reminder that not all divisions have the same agricultural risks. Costa targets segments where the company has scale advantages and a strong market position, which is one key reason for our positive rating.

Endeavour Group reported a solid 1Q23 sales result. In Retail, Endeavour’s store only sales fell 3% and we estimate the liquor industry dropped by 2% in the quarter. In Hotels, Endeavour’s weekly run-rate of sales jumped by 8% in 1Q23 compared with 4Q22 and momentum looks good into Christmas.

Metcash’s strategy day outlined more initiatives to drive sales growth and higher capex. The strategy is logical given its market position and more profitable retailers. In our view, revenue growth will be structurally better than historically. In food, the market is more rational both for store growth and pricing, which will mean much better growth than 2010-2019. In Hardware and Liquor, as a clear number two, the company has opportunities to drive new stores and refurbishments. While growth is stronger, capex will be over $200 million a year and in part a necessary investment in supply chain and IT to enable growth.

We have upgraded our retail sales outlook for FY23e given such a strong start to the fiscal year and the benefit that wages growth and inflation will have on sales over the next six months. We forecast retail sales growth of 6.0% (prev 3.4%) for FY23e and 0.8% for FY24e (prev 2.4%). The weakest period of sales growth is likely to be the December 2023 half in our view, making the downturn still some time away. We are watching retail inflation closely.

Metcash will host an investor day on 17 and 18 October 2022. This is the first opportunity for new CEO Doug Jones to set his agenda for the company. We expect the focus to be about initiatives that drive sales, more so than margins. Updating the company’s IT and distribution centres is likely to be a near-term focus. We will look for information about initiatives to drive more store refurbishments as well. We are interested in longer-term challenges such as developing a better value offer and private labels; considering expansion into food service or pharmacy and how the business will compete online. The strategy may not move numbers much, other than higher capex in our view.