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.

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.