Our feedback from a range of contacts is that Christmas 2021 trading was solid, particularly given the high base from 2020. The strongest feedback comes from the furniture sector. Whitegoods were strong and supermarkets had a late rush in sales. While a good festive season, the debate is going to shift quickly to the impact that COVID-19 has had on January 2022 trading. Sales could be down 10%-20% for the month leading to 3%-5% full year EPS risk in our view.

Australians like to holiday both locally and overseas. With locked borders over 2020 and 2021, reduced tourism spend has been a source of savings and some of the spare cash has also made its way into retail. As tourism recovers, will retail sales slow? In Issue 2 of The Retail Mosaic, we analyse the change in tourism spending over recent years and assess the possible recovery path and its impact on retail. The good news for retailers is that any recovery in tourist spending is likely to be gradual and centre on domestic trips. Given almost half of spending by tourists while on domestic holidays is in retail stores, then the recovery in holidays may prove to be a smaller drag on retail than some fear

Woolworths has provided a trading update to flag COVID-19 costs have had a bigger drag on earnings. Sales trends are solid, but even underlying cost growth looks elevated to us. We expect three-quarters of the one-off costs of $255 million to unwind, but we are concerned that online is creating a bigger drag on margins. Big W also has lower sales and margins.

It’s shaping up to be a great Christmas for Australian retailers, but the share market remains cautious. Sales feedback is positive. Margins are likely to surprise on the upside. We are hearing strong feedback in appliances, apparel and footwear. Given November-December can be more than one-third of annual earnings, there is upside to consensus expectations for FY22e in our view. While sales look good, investors are nervous about buying into a peak in retail earnings.

Metcash reported 1H22 EBIT up 14%. The growth was driven by a full-period contribution from Total Tools in Hardware. Total Tools still has a runway for further growth given imminent store acquisitions. The company has also fundamentally stabilised its market share in Supermarkets. Metcash has a much better business mix and industry structure than historically and as a result the shares should trade at a higher multiple.

Woolworths has made a bid for API, trumping Wesfarmers takeover offer. This battle has just begun. Both companies have the balance sheet. Both see improvements in Priceline’s sales and earnings. Wesfarmers is likely to place a greater value on both the Priceline loyalty members and the platform API may create for a Health division in our view.

Australian GDP fell by 1.9% in the September 2021 quarter, but the national accounts provide a more positive take on the consumer. Wages grew, savings lifted and, even with lockdowns, some areas of retail saw growth like food and online. The statistic that raises the most significant debate is savings. Household savings were 18% of income and households have saved more than $365 billion since the start of 2020. Such significant savings makes us more confident of a soft landing in retail over the next 12 months.

Treasury hosted a meeting with Penfolds MD, Tom King. The discussion clarified Penfolds emphasis on luxury wines and efforts to lift its distribution reach across key markets. The next 12 months will be about the globalisation of the brand with French and Californian product released. The company is holding firm to its target of 40%-45% EBITS margins. We see 40% as more plausible as marketing investment is required to build the brand in key markets.

Harvey Norman provided an encouraging AGM trading update with recovering sales trends in the past two months and continued strong profit margins. Australian sales improved from -19% in July-August to -6% for September-November. Profit margins are holding up well with three-quarters of the gains seen in FY21 retained in 1H22e so far.

Treasury Wines has announced the acquisition of Frank Family Vineyards for A$432 million and is funded with debt. The US luxury chardonnay brand is a good fit for Treasury Wines and earnings could easily triple on a four-year horizon.  Treasury Americas targets 25% EBITS margins, up from last year’s 16%. Acquiring Franks Family Vineyards adds 170bp alone. While a good deal, it is small. Perhaps more luxury wine brand acquisitions are ahead.