Australian national accounts for the December 2024 quarter paint a clear picture on the drivers of a noticeable improvement in retail spending over that time period. Household income rose 5.6% with wages growth of 6.1%. Retail spending was up 4.0%. It appears close to half the tax cuts have been spent and non-retail spending is no longer crowding out spend. From here, sales growth should improve modestly as retail captures its fair share of the wallet. A slowdown in population growth of circa 0.5% needs to be taken into consideration as a partial offset and, along with low prevailing savings rate, informs our view that the retail upswing will be modest over the next 12 months.

Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Woolworths reported sales up 4%, but EBIT down 14% in 1H25. We expect the company will have a challenging 2H25e as well. Management is starting to address its challenges. CEO, Amanda Bardwell, said that the company will assess the shape of its business portfolio. Each business unit must have reasonable prospects on a 3-5 year view. Overhead costs are being cut and there is a tougher stance on the low returning Big W and NZ divisions.

Australian retail sales rose 4.1% in January 2025 with decent signs of growth across most categories. Liquor is still lagging, while hardware and electronics were softer than recent months. Pharmacy and recreational goods were the standout segments. We expect retail category and company divergence to rise over the next six months. Overall sales trends are likely to bounce around the 3%-4% mark, which is satisfactory growth, but still a challenge relative to cost growth.

Inghams reported 1H25 poultry volumes down 2.7% and EBITDA dropped 10%. Price realisation was good and Inghams had feed cost reductions and admin cost savings to partly offset the volume decline. Prices are 19% higher than three years ago. This is important as it signals that new contract wins to replace lost volume with Woolworths has not been done at irrational prices.

Accent Group reported 1H25 EBIT of $81 million, up 11%. The gross margin deterioration of 100bp owing to promotional intensity lead us to lower full year expectations. The nearing maturity in the store opportunities for Platypus and Skechers see us lowering our long term store forecasts by 4.5%. We incorporate an upside case in our valuation for a deal with Frasers Group.

GyG reported 1H25 network sales growth of 23% and network EBITDA growth of 28%. The strong sales have been helped by growth of breakfast sales and after 9pm. In addition, delivery sales have grown as a share of the business. While there was less operating leverage than hoped, the primary driver is additional store openings, which are a drag on margins in their first 12 months. While near-term leverage is softer, the company’s scope for store growth and margin expansion remains strong.

Super Retail Group reported 1H25 sales up 4%, but EBIT down 7%. The typically resilient Supercheap Auto division had a 6% decline in EBIT. The increasingly competitive sales backdrop for Auto makes it challenging to see much earnings recovery over the next 18 months. Elevated competition will continue to be a headwind in Supercheap Auto and we expect flat like-for-like sales for 2H25e and FY26e. Elsewhere, sales trends are improving and mid single-digit sales growth is likely for Rebel, BCF and Macpac in 2H25e.

Wesfarmers reported 1H25 EBIT growth of 5%. It was a solid sales and margin result in Kmart and WesCEF. Bunnings showed better sales trends, although underlying margins dropped slightly. The swing factor for Wesfarmers earnings growth over the next few years remains lithium and the path to profitability is most likely another 18 months away. Investors will need patience as well as optimism that lithium prices can rise from current depressed levels.

Australian wine export data for the December 2024 quarter showed continued demand from China for Australian red wine. China bottled wine volumes were 1.4 million cases with a value of $280 million. The past nine month export value to China is within 11% of the record 2019 levels. Volumes in other regions declined in the quarter.