We initiate coverage of Super Retail Group. The company may have a challenging six months over the remainder of 2021 given lockdowns and a very high base from 2020. Fundamentally, the company has lifted its online penetration, increased its loyalty cardholder base and reduced discounting. These changes all support higher EBIT margins medium term. Moreover, the balance sheet is net cash.

Treasury Wines reported FY21 EBITS of $510 million, with 2H21 EBITS up 45%. While China earnings were down given tariffs, the company successfully reallocated wine to the rest of Asia and this will continue in FY22e. Grape costs have been a headwind for two years. However, price growth was ahead of COGS growth in 2H21 and lower grape costs will boost EBITS from late FY22e onwards. Penfolds contributed 68% to group EBITS in FY21 despite the loss of China.

Coles reported FY21 EBIT of $1,873 million, up 6%. The second-half EBIT was flat. Coles Supermarkets had a much stronger 4Q21 sales result and stabilised market share. While the sales outlook is improving, we note that cost growth was elevated in FY21, and higher costs will be a handbrake on any further margin expansion.

We initiate coverage on JB Hi-Fi. In our research report, we assess the sustainable earnings base. JB Hi-Fi has won market share, which has supported operating leverage. The majority of the gross margin gains in The Good Guys are likely to stick given both an improved sales mix and better bargaining with suppliers. The company also has a net cash position providing it with opportunities for growth or capital management.

We initiate coverage of Treasury Wine Estates. After a tough 18 months, we expect stabilisation in earnings the shift to a “divisional” model that separates Penfolds will put the spotlight on that segment. The loss of earnings from China is painful, but the reallocation to other markets is likely. The company has scaled back its Americas business to focus on premium wines. The simplification of Treasury and focus on its core brands should support both sales and margins.

We initiate coverage on Wesfarmers. While Wesfarmers retail businesses are well positioned, they have seen significant benefits to sales and earnings over past two years, which will partly reverse. As a result, retail earnings could drop over the next two years. A special dividend is possible near-term. Wesfarmers has over $10 billion in acquisition capacity on our estimates, but in recent times has only made smaller adjacent acquisitions within existing businesses. The creation of a Health segment is one logical extension for the company with an Australian healthcare industry EBITDA profit pool of over $28 billion.

The feedback from companies experiencing cost pressures is growing. The spike seen in both soft commodity prices and transport costs has persisted for longer and will lead to higher supermarket inflation in our view. The only remaining question is when, and by how much? We expect some evidence to show through in August-September 2021 given supplier feedback. Packaged grocery inflation is likely to be 1.5-2.0pp higher by early calendar 2022. Inflation is generally positive for supermarket retailers sales and earnings.

We have a positive outlook for both revenue growth and profit margins for Coles, Metcash and Woolworths. Higher food inflation is likely to show through and offset the pressures from lower population growth and lapping COVID-19 induced sales growth. Higher inflation is not simply transitory, but has been evident since 2019. The market structure in both supermarkets and liquor add to the investment appeal. We also see a strong recovery for Endeavour Group and can make acquisitions in Hotels.