Tobacco may be somewhat inconspicuous in supermarkets but it has a meaningful impact on sales and margin outcomes given demand has dropped significantly in the past year. Metcash faces the biggest headwind given tobacco could account for 15% of group sales. The drop in tobacco is partly driven by the rise of illicit tobacco and vaping.

Retail prices may be the first to contribute to lower inflation. Recent data from the ABS shows the impact that sea freight costs had on certain retail categories through COVID-19. The chart below shows freight costs as a share of the total product cost for imported product categories. Furniture freight went from 6% of the total cost in 2019 to 19% in February 2022.  It was a similar story for appliances.  The unwind of retail inflation is likely to vary greatly by category and is happening already in highly imported categories. In our view, these retail segments are likely to report the weakest sales trends as inflation unwinds quickly. For more click here Report on retail outlook

Domino’s trading update revealed the company is yet to find a way to raise prices without damaging volumes. EBIT is on track for a 21% fall to about $92 million in 2H23e. We estimate FY23e EBIT at $206 million rising to $223 million in FY24e given announced cost savings. The balance sheet position is particularly tight at the end of calendar 2023, but we see a lower dividend payout as most likely to avoid a capital raising. The earnings trough is in sight. However, the PE ratio is still high and the company will need to demonstrate franchisee profitability can improve in order for the share price to rise from here.

Australia’s national accounts for the March quarter provides a clear narrative about the state of the consumer in 2023. Wages growth is very strong and even though interest rates are starting to bite, households are still spending. They have lowered their savings and switched spending to travel and recreation. The retail downturn thus far is only partly attributable to higher interest rates. The combination of a continued switch in spend outside of retail and higher interest rates mean the downturn will become more acute over the next six months. We may not see a return to trend growth in retail until 2025.

The Fair Work Commission’s decision to increase wages for FY24e by 5.75% will create a headwind for retailers. The magnitude of the pressure will depend on the sales run-rate and given we are already in decline in non-food categories, the squeeze from rising costs and falling sales could lower earnings in FY24e by 8%-14% for many non-food retailers. Our review of consensus expectations suggests the market is too low on cost growth for Bunnings, Super Retail Group and Premier Investments. We also note that the Fair Work Commission suggested that future pay rises are more likely to be above inflation, which adds to risks in FY25e.

Wesfarmers’ strategy day highlighted its growth projects and market share opportunities, despite an increasingly challenging economic environment. The businesses may be relatively resilient, but they are not immune. The combination of slowing sales and rising operating costs keep us cautious.

Australian retail sales rose 3.3% in April 2023, which is the first month of fundamental weakness in a long time. The softness is skewed towards housing categories. Electronics, hardware and furniture sales are all falling. Fashion has reverted to low single-digit growth too. Online has recovered, but is only slightly ahead of overall sales growth. We expect weak sales trends for the remainder of 2023.

On 2 June 2023, the Fair Work Commission is due to make its decision about minimum wages for fiscal 2024. April 2023 trimmed mean inflation was 6.7% and other measures of price rises are fairly similar. In past minimum wage decisions, the Fair Work panel has decided to raise wages by 0.5% to 1.0% above the prevailing trimmed mean inflation. The Fair Work Commission is likely to be “inflation-matching” in our view and therefore an outcome above 6.0% is most likely. For more on wage risks for retail, see this report What if retail wages rise 8%?

Treasury’s guidance suggests group revenue will fall about 7% in 2H23e. We estimate Treasury Americas revenue could be down 23% in USD terms. This is a large drop from three factors – reduced 19 Crimes sales, lower Sterling brand sales and the Californian fires impacting Vintage 2020 luxury wine released. While the luxury sales should rebound, we are more cautious on 19 Crimes and Sterling, which may have to reset lower as smaller brands. Given the deteriorating 2H23e, growth in FY24e will be impacted. We forecast FY24e revenue of $2,437 million, growth of 1%.

Costa emphasised an “exceptional” period in its International operations. Morocco has benefited from good yields and relatively high prices, given the rival Spanish blueberry harvest has been poor. China has had the increased hectares contribute revenue alongside higher prices. We think there will be some normalisation in FY24e and forecast EBITDA of $97 million.