As key states of Australia emerge from lockdowns, we expect sales trends to improve for JB Hi-Fi. The demand for key categories like TVs, whitegoods and small appliances is likely to be strong. More importantly, with some tightness of supply, we expect gross margins across the electronics industry to remain firm in the medium term, particularly for The Good Guys. JB Hi-Fi has the added flexibility of a net cash position.

Domino’s faces a risk of slowing sales. We expect same store sales growth (SSSg) to slow meaningfully over the next 12 months. While Domino’s has had strong sales and store openings, some of its sales gains are a result of COVID-19 lockdowns in our view. In Japan we expect SSSg to turn negative in 2022, this is the region that had the largest growth over 2020 and 1H of calendar 2021. As economies reopen, consumers will have other food choices.

Australian vaccination rates are rising and greater Sydney may emerge from its lockdowns next month, which raises the question: how will retail perform for the rest of 2021? In this report, we present a number of charts looking at the US and UK as their vaccination rates increased and lockdowns ended. Interestingly, we find that retail sales in the US and UK accelerated and the earlier winning categories of hardware, furniture and electronics remained the fastest growing categories. Buoyant supermarket trends were largely unchanged and online sales only slowed in the UK.

Wesfarmers has increased its bid for API to $1.55 per share, a 12% lift in its offer price. The API Board has indicated support. While the enterprise value is less than $1 billion, it is an important development for Wesfarmers as it establishes a Health segment. More acquisitions may follow. API is also likely to be part of Wesfarmers digital ecosystem over time.

Australian online sales represent 13% of all retail sales. Even though growth has been very strong over the past five years, we expect online to continue to grow much faster than bricks & mortar. In Issue 1 of The Retail Mosaic, we size the Australian online market by category, compare Australian retailers with US and UK peers and provide a framework for online penetration growth over the next decade. Australian online penetration is likely to reach 21% in the next ten years. This level of growth online means mature retailers will need to eliminate net store openings, invest more in their IT and supply chain and improve their customer data.

We initiate coverage of Inghams Group, the largest poultry company across Australia/NZ.  The drivers of Inghams earnings growth are continued solid demand growth for poultry, a favourable sales mix and reduced feed costs. The company can also make acquisitions and may expand into pet food supply or meal kits. We see an upside skew in margins with a better sales mix and rational pricing in the poultry market for both Australia and New Zealand.

Australian National Accounts for the June 2021 quarter show some normalisation compared with the lockdown impacts on income and spending a year ago. Two-year CAGR household income growth is 5% which compares with retail sales CAGR growth of 6% for the June quarter. Australians have also saved $243 billion since the start of 2020. This elevated level of savings will be the first bucket of money used for holidays when borders reopen. Any slowdown in retail spending is likely to be more modest than people expect.

Wesfarmers reported FY21 EBIT up 18%. However, Bunnings and Kmart earnings are likely to fall in FY22e given lockdowns and a normalisation in demand. These two businesses account for over 80% of group earnings. The company also flagged investment in its “digital ecosystem”. We expect elevated capex to persist as Wesfarmers catches up in online. There is upside risk to capex projects as IT and supply chains may need to change if online penetration becomes meaningful.

Woolworths reported a solid FY21 result with EBIT up 14% to $3,663 million. Second-half EBIT growth was a little stronger with the unwind of COVID-19 costs and better earnings in Big W. While good earnings growth, underneath Woolworths had higher operating cost growth and elevated ongoing capex. Moreover, elevated capex will continue over the next two years in supply chain and IT.

We initiate coverage of Domino’s Pizza Enterprises. The company is the master franchisee for Australia, New Zealand, Japan Taiwan, France, Germany, the Netherlands and Benelux. The company has recently upgraded its long-term growth targets, but also the long-term opex and capex outlook. The upside risks are faster store openings, better margins and additional territories such as Korea. The downside risks are COVID-19 unwind of sales, more capex and online competition from delivery aggregators.