Retail price inflation accelerated in the December 2021 quarter, albeit the increase was not uniform across all categories. Red meat, health & beauty, hardware, furniture and auto parts all had high inflation, while fruit, appliances and clothing prices all fell year on year. Supermarket inflation only accelerated by 30bp in the quarter. We expect more noticeable price rises in categories like supermarkets, sporting goods and electronics in the first-half of calendar 2022.

While it is difficult to precisely forecast Australian retail sales given the uncertainties in the economy, we are confident enough to predict another solid year of growth. We expect retail sales to rise 3% in 2022, which is a strong result on top of 7% growth in 2020 and 5% growth in 2021. We estimate food sales will rise 4% and non-food sales to increase by 1%.  In our view, the three issues that will influence retail sales the most are the magnitude of price rises, the pace of wages growth and the extent to which consumers reallocate spending away from retail. Given COVID-19 is still with us, retail is likely to outperform once again.

We expect a more mild slowdown in Domino’s same store sales growth (SSSg) in key markets as higher COVID-19 cases are likely to lead to more sales of pizza. Our analysis of data from restaurant bookings in Japan has shown a drop recently, which is likely to lead to more home delivered food. Europe is also likely to have decent SSSg in 1H22e. In the report, we address  Domino’s Japan’s potential same store sales path; Domino’s Europe’s exposure to rising COVID-19 cases; and The upside and downside risks from here.

Inghams has provided a business update highlighting the challenges given exploding COVID-19 cases in Australia over the past four weeks. While little financial detail was provided, we have lowered our EBITDA by $67 million to $413 million in FY22e. About two-thirds of the downgrade relates to COVID-19, the remainder is higher feed costs, which is an ongoing concern given recent spot prices are up double-digit. The company will provide more detail at its results in late February 2022.

JB Hi-Fi provided a January 2022 trading update with improving sales trends in 2Q22. NPAT of $288 million was down 9% on 1H21, but up 69% on 1H20. While many are wary an anticipated mean reversion in sales and earnings, it may be gradual. While volumes will mean revert, price inflation is likely to accelerate, gross margins are likely to be higher in The Good Guys and there will be operating leverage.

Wesfarmers trading update provides a reminder about the challenges facing the retail-centric company. Kmart’s earnings fell 56% in 1H22e on a sales decline of 10%. The fall in earnings suggests higher costs, some of which will persist as global supply chains become more expensive and online grows as a share of sales. While Kmart had a tough half, Bunnings earnings may have only fallen slightly and WesCEF was up.

Our feedback from a range of contacts is that Christmas 2021 trading was solid, particularly given the high base from 2020. The strongest feedback comes from the furniture sector. Whitegoods were strong and supermarkets had a late rush in sales. While a good festive season, the debate is going to shift quickly to the impact that COVID-19 has had on January 2022 trading. Sales could be down 10%-20% for the month leading to 3%-5% full year EPS risk in our view.

Australians like to holiday both locally and overseas. With locked borders over 2020 and 2021, reduced tourism spend has been a source of savings and some of the spare cash has also made its way into retail. As tourism recovers, will retail sales slow? In Issue 2 of The Retail Mosaic, we analyse the change in tourism spending over recent years and assess the possible recovery path and its impact on retail. The good news for retailers is that any recovery in tourist spending is likely to be gradual and centre on domestic trips. Given almost half of spending by tourists while on domestic holidays is in retail stores, then the recovery in holidays may prove to be a smaller drag on retail than some fear

Woolworths has provided a trading update to flag COVID-19 costs have had a bigger drag on earnings. Sales trends are solid, but even underlying cost growth looks elevated to us. We expect three-quarters of the one-off costs of $255 million to unwind, but we are concerned that online is creating a bigger drag on margins. Big W also has lower sales and margins.

It’s shaping up to be a great Christmas for Australian retailers, but the share market remains cautious. Sales feedback is positive. Margins are likely to surprise on the upside. We are hearing strong feedback in appliances, apparel and footwear. Given November-December can be more than one-third of annual earnings, there is upside to consensus expectations for FY22e in our view. While sales look good, investors are nervous about buying into a peak in retail earnings.