Super Retail Group reported 1H22 sales down 4% and EBIT down 33%. The process of normalisation in earnings has begun. We expect 2H22e sales to rise 1.3% and EBIT to fall 11%. The company’s elevated inventory position is largely skewed towards Supercheap Auto, which in inherently lower risk than its other segments. Operating cost growth will continue in 2H22e given data and digital investments, but there is some flex to manage labour costs to sales.

Amazon Australia recently released its financial accounts, providing an interesting perspective about the battle online. We calculate that Amazon grew gross transaction value by 48% to $2.6 billion in 2021. Catch Group and Kogan had broadly flat sales. Amazon’s EBITDA margin was 1.9%, which is better than Catch and Kogan. There is an increasing intensity of competition between Amazon, Wesfarmers and Woolworths to capture customers in their “digital ecosystem”. It is not clear who will be the winner. What is clear is that it will take time and money to be successful. The costs will likely outweigh the revenue gains over the next 1-3 years.

Wesfarmers reported a 12% fall in 1H22 EBIT. While the company flagged a drop in group earnings, the fall in Bunnings earnings and higher cost growth raises concerns. We expect earnings to fall in 2H22e as well. The bigger picture is Wesfarmers is lapping very strong earnings across its retail businesses from FY21. We are not concerned about price inflation creating a headwind because Wesfarmers operates in rational markets. However, higher operating costs are likely, including additional investment in digital capabilities as the company competes for a more viable position online.

Treasury Wines reported an EBITS decline of 7% for 1H22. This fall in earnings was largely expected given brand divestments and the loss of earnings in China. The good news for the company is that it should see earnings growth from here. Higher margin channels should recover, grape prices are likely to fall and the acquisition of Frank Family Vineyards will contribute to earnings. The report includes a discussion about the company’s margin targets, inventory position and cost of grapes.

JB Hi Fi reported a good 1H22 result given the very elevated base from the prior corresponding half. Given its update in mid-January 2022, the new insights from the release showed solid January 2022 sales trends and a good gross margin result in The Good Guys. We expect stable sales and continued healthy gross margins to result in a fade in earnings rather than a fall off the cliff over the next two years. JB Hi-Fi also announced an off-market buyback of $250 million. We expect the company to continue holding a net cash position at the end of FY22e even after the buyback.

We initiate coverage on Costa Group, the largest fruit & vegetable grower in Australia. The company produces mushrooms, citrus, berries, avocados and tomatoes. The key determinant of earnings over the next three years will be price realisation across its domestic and international markets. We expect pricing has stabilised in Australia, but we are cautious about blueberry pricing in China and Morocco in the next 12 months. The company has a promising path for earnings growth over the next three years given increased citrus exports, its tomato glasshouse expansion and hectare growth in China.

The US wine grape crush report for 2021 shows a bigger vintage with higher grape prices. Pricing has recovered to be above 2019 levels after a depressed period in 2020. We should receive information about the Australian 2022 vintage in the next month or so, with another big harvest likely and a downside skew to grape prices. We see lower grape prices in Australia as a net benefit to Treasury given Australia would be two-thirds of its production and COGS could fall.

The February 2022 reporting season for retail, food and beverages is likely to show a wide dispersion in performance amongst companies. While sales trends have been good across the board, some have converted that to earnings better than others. We expect good results from household goods retailers like Harvey Norman but are below consensus on earnings for Domino’s and Endeavour Group. We expect stocks to be influenced by trading updates for January 2022 sales and commentary about price inflation and cost pressures. The full report provides a preview of major ASX-listed retailers potential earnings results.

The prospect of higher price inflation could significantly impact a retailer’s sales, earnings and valuation over the next three years. In Issue 2 of Price Watch, we analyse the impact price inflation has on supermarkets and non-food retailers and assess the likely volume response to price rises. The good news is even in non-food retail, price inflation 2-3 percentage points higher than average will lead to better sales, earnings and a PE re-rate.

The outlook for Coles and Woolworths in 2022 is looking better. The risks around COVID-19 costs are now well managed. We expect upside from consumer stockpiling near-term will lift sales earnings and higher food inflation over the next 12 months will be positive for earnings. In this report we look at how the COVID-19 costs may unwind and the impact that higher food inflation will have on the supermarket sector.