While JB Hi-Fi had a record half of earnings in 1H23, that is in the rear-vision mirror. The forward trajectory suggests a normalisation of sales and earnings is imminent. We expect negative comp sales in 2H23e and 1H24e for both JB Hi-Fi Australia and The Good Guys. We expect gains from inflation, and The Good Guys improved buying terms.

Australian households may have a lot of debt, but they also have a lot of money sitting in bank deposit accounts. We keep a close eye on banking regulator data that discloses household deposits. At 31 December 2022, the total balance of household deposits was $1.39 trillion. It’s an impressive figure and equates to $125,000 per household, on average. On our analysis, deposits are about $16,000 per household higher than the trend line would suggest, which reflects the majority of the excess savings built up during lockdowns. More cash in the bank is supporting consumer spending and one of the reasons there is a disconnect between sentiment and spending in our view. For more on the disconnect between sentiment and spending, see this report, What correlates with retail sales? The disconnect between sentiment and spending

Australian retail sales data for December 2022 shows strong overall growth but increasing dispersion across categories. Both supermarkets and cafes & restaurants did well. Department stores also had a strong month. Household goods were weak, especially given the level of price inflation. Additional disclosure from ABS on volumes, shows that 80% of the strong December quarter for retail growth came from price inflation. The timeline of price inflation fading will have a significant bearing on the slowdown in retail in 2023 and adds to near-term risks in household goods but should result in stronger sales in food categories for this calendar year.

Australian retailers will deliver good results for the upcoming reporting season in February and March 2023, once again mystifying many that worry about higher interest rates. While reporting season will reveal impressive earnings for most, we are becoming more cautious. It may sound like a contradiction, but this set of results is likely a peak and earnings could fall meaningfully over the next 18 months as sales growth falls below cost growth.

Endeavour Group reported 1H23 EBIT growth of 16%. The result was characterised by a strong increase in profit margins in Hotels and good cost control in its Retail segment. However, when we look at performance from 1H20 to 1H23, operating cost growth has outstripped revenue growth in both Retail and Hotels. Cost growth will remain a headwind in our view over the next two years. Another unknown for investors is higher capex (or opex) associated with Endeavour’s technology transition over the next four years. We expect very limited earnings growth over the next two years as operating cost growth limits margin expansion.

Australian inflation for the December 2022 quarter was 7.8%. Retail categories have had similar price increases, propping up retail sales growth. Retail volumes are already flat to declining based on our analysis. Packaged grocery inflation accelerated further to 7.0%. We expect the rate of retail inflation has peaked and volumes will start to decline at a faster rate this year.  This is more likely the risk in supermarkets, furniture, appliances and auto parts. Nonetheless, overall nominal retail sales growth will continue to be underpinned by price inflation over the next six months.

Australian retail sales growth of 7.7% for November 2022 continues the strong run during the calendar year. The growth is impressive given incredibly strong growth in both 2020 and 2021 for November as the country emerged from lockdowns. There was very high growth in café & restaurants, a sign of consumer confidence in our view. Sales rebounded strongly in supermarket and liquor too. Generally, high price inflation is propping up growth across the industry and will continue to do so into the first-half of calendar 2023.

Back in July 2022, the wage determination for the Australian General Retail Award resulted in wage increases of 4.6%-5.2% for employees, with an additional boost from higher employer superannuation contribution. What will the next wage determination bring? Historically, we have typically seen retail wages rise slightly more than inflation. If that is the case, we think retail wages growth may be around 5% again for the 12 months starting 1 July 2023. This will be good news for employees, but a challenge for retailers as sales growth starts to slow.

It is inevitable that Australian retail sales growth will be much weaker in 2023 compared with 2022. We forecast industry sales growth at 2%, down from 11% last year. Many are anticipating that retail spending will fall off a cliff. However, volumes are already weak. It is price inflation that is supporting above trend spending. We expect inflation to taper off gradually, which means a more visible downturn in retail sales in the July-December 2023 period in our view. The categories most vulnerable to an earlier slowdown are furniture, hardware and recreational goods where we forecast a decline this year. In the food sector, elevated inflation will support growth of 5% in 2023. The risks to our retail forecasts are to the upside if inflation is higher and households dip into their excess savings built up over the past three years.

We expect Christmas retail sales to surprise on the upside with a partial offset in lower profit margins. The strongest feedback comes from department stores, electronics and supermarkets. However, not all have done well. Off-premise liquor looks to be in decline and womenswear feedback is weak.