Costa has had a tough year. However, we think the worst of its issues are transitory. There are risks given the recent CEO departure. However, the company’s recent trading update has cleared the air on citrus and its mushroom site tour in South Australia provides a reminder that not all divisions have the same agricultural risks. Costa targets segments where the company has scale advantages and a strong market position, which is one key reason for our positive rating.

Endeavour Group reported a solid 1Q23 sales result. In Retail, Endeavour’s store only sales fell 3% and we estimate the liquor industry dropped by 2% in the quarter. In Hotels, Endeavour’s weekly run-rate of sales jumped by 8% in 1Q23 compared with 4Q22 and momentum looks good into Christmas.

Metcash’s strategy day outlined more initiatives to drive sales growth and higher capex. The strategy is logical given its market position and more profitable retailers. In our view, revenue growth will be structurally better than historically. In food, the market is more rational both for store growth and pricing, which will mean much better growth than 2010-2019. In Hardware and Liquor, as a clear number two, the company has opportunities to drive new stores and refurbishments. While growth is stronger, capex will be over $200 million a year and in part a necessary investment in supply chain and IT to enable growth.

We have upgraded our retail sales outlook for FY23e given such a strong start to the fiscal year and the benefit that wages growth and inflation will have on sales over the next six months. We forecast retail sales growth of 6.0% (prev 3.4%) for FY23e and 0.8% for FY24e (prev 2.4%). The weakest period of sales growth is likely to be the December 2023 half in our view, making the downturn still some time away. We are watching retail inflation closely.

Metcash will host an investor day on 17 and 18 October 2022. This is the first opportunity for new CEO Doug Jones to set his agenda for the company. We expect the focus to be about initiatives that drive sales, more so than margins. Updating the company’s IT and distribution centres is likely to be a near-term focus. We will look for information about initiatives to drive more store refurbishments as well. We are interested in longer-term challenges such as developing a better value offer and private labels; considering expansion into food service or pharmacy and how the business will compete online. The strategy may not move numbers much, other than higher capex in our view.

Domino’s share price has fallen a long way in 12 months. In just the past two months, the stock is down 29%. The main concern is European earnings. We agree and consensus may be 5%-10% too high for FY23e. Within the next six months, the company has enough flexibility to manage its costs and may start to see some cost recovery through pricing.

Consumer sentiment for October 2022 is 19% below the long-term average, suggesting consumers are worried. However, consumer sentiment is at odds with consumer spending. Most of the time what consumers say and what they do disconnect. Instead, we focus on measures of consumer behaviours in order to gauge the retail outlook. Restaurant and café spend has a 3x stronger correlation with retail spending than consumer sentiment. Restaurant bookings are up 23% on pre COVID-19 levels in October. Housing churn is up 80% on pre COVID-19 levels. Food inflation is 14% higher than 2019 and retail spending is up 25% on 2019 levels. There are no signs of a slowdown in spending behaviours on the near-term horizon.

Measures of consumer behaviour and sentiment

Retail sales are a function of volume, price and mix. While volume and price receive plenty of attention, mix is often mis-understood, or not disclosed. In Issue 4 of Price Watch, we explore mix and its impact on sales. Successful businesses drive mix higher through their deliberate product and price decisions. Consumers will also make conscious choices about their basket mix depending on income, convenience, demographics and the cost of living. In the limited disclosure on mix we have, we find that it accounts for anywhere from one-quarter to half the sales growth for large retailers, with a higher contribution over the past two years. More disclosure on mix would lift perceptions about the quality of sales growth as pure price rises or excessive volume growth are often seen as unsustainable.

Endeavour’s Hotel segment is in greater focus given recent comments from various state governments about changing regulations on poker machines. We estimate gaming accounts for 24% of group EBIT for Endeavour. Given state governments generate over $6 billion in revenue from gaming machines, we see a shift of the profit pool to government in the form of higher taxes as the key risk to Endeavour. The perception of risk about poker machines will ebb and flow depending on news headlines.

Australian retail sales rose 19.4% year on year in August 2022. The three-year compound annual growth rate for August was 7.7%, very similar to July 2022 at 8.3%. The most interesting headline is online sales were down 15% year on year, but this largely reflects lockdowns from last year. The three-year online CAGR is still 27%. We expect overall retail sales will remain firm with the first signs of weakness likely in November 2022 given two years of high growth for that month. Retail sales are likely to be softer in 2023 as higher interest rates take effect and savings rates are lower.