Costa held a site tour of its expanded Guyra, NSW tomato growing facility. The company has added technology in propagating, growing and packing that will improve yields and lower costs per kg. The medium-term opportunity is growth in snacking tomato sales which generate a much high price per kg and could add up to $40-60 million to revenue on our estimates. See the report for more insights about its expanded facilities.

JB Hi-Fi provided a sales update revealing accelerating sales trends in February and March 2022. Given the high sales hurdle from last year, the trends are impressive and set the company up for a very strong 2H22e. We expect the sales strength to carry-on until late calendar 2022.

City Chic has a strong sales growth outlook but profit margins are likely to remain near current levels. Premier has a modest sales growth outlook from here and profit margins may fall. However, we see optionality given the company’s balance sheet. Premier may accelerate Peter Alexander store rollout, acquire a controlling stake in Myer or acquire a fashion business in youth apparel or accessories.

Higher petrol, coal and gas prices are a growing risk for retail, food and beverage companies. The magnitude of earnings downside would be in the order of 5%-10% if the higher prices continue for a full 12 months. We see near-term risk around transport costs for food retailers. For consumers, higher petrol prices may take away up to 0.7% from consumer spending. It’s equivalent to a 60bp interest rate increase. However, the price increase is still within the scope for households to absorb by lowering their savings rate rather than lowering spending.

Australian retail sales rose 5.8% in January 2022. The detailed breakdown shows smaller retailers did well and all household goods categories lapped strong growth. Liquor, takeaway food and department stores all reported a sales decline.  As COVID-19 cases have fallen, spending has improved in February 2022. We expect accelerating price inflation to further support sales growth. We forecast retail sales growth of 3% in 2022, on top of 5% in 2021 and 7% in 2020.

The Australian consumer has exited lockdowns in a strong financial position. In the December 2021 quarter, household income grew 5%, which is better than long-term trends and the savings rate was 14% of income. We estimate households have $200 billion in excess savings to fund holidays and a return to normal spending patterns. This bodes well for a soft landing in retail sales for 2022.

Harvey Norman delivered a solid 1H22 result with sales down 6% and profit before tax down 21%, excluding property revaluations. Earnings improved in the final two months of the half as lockdowns eased. The company has good control on costs and inventory levels are lean, but not short. We forecast FY22e PBT down 15%, which implies a smaller 2H22e earnings decline.

Domino’s reported a 6% drop in EBIT despite 11% sales growth in 1H22. The company saw a decline in SSSg for Japan and some disruptions in Australia/NZ. Domino’s noted that Japan sales are rebasing lower, which will lead to lower sales growth through to September 2022 in our view. Our key observation from 1H22 result was cost growth running ahead of sales growth. Such growth was outsized and if it continues will dampen margins across FY22e.

Woolworths reported sales up 8% but EBIT down 11% in 1H22. Even though COVID-19 disruptions added costs, underlying cost growth was also elevated, which we attribute to higher online sales. The company noted that food inflation had accelerated 2%-3% in early 2022, which is a good sign for earnings. We expect Woolworths to proactively work on lowering costs over the next two years.

Coles reported 1H22 EBIT down 4% to $975 million. The company has managed costs well and stabilised market share in Supermarkets, while growing share in Liquor.  We expect sales and earnings to improve in 2H22e, driven by higher food inflation. We estimate an acceleration of 150bp in packaged grocery inflation. Note there will still be a headwind to earnings in Liquor from rising costs and in Express as tobacco sales fall.