Treasury Wines update on its Penfolds division highlights the confidence the company has in the long-term global demand for its luxury wines. The company has lifted key product prices by 6% and will have more luxury wines to sell by FY26e under Penfolds Bin & Icon labels. The biggest swing factor for long-term earnings growth in this business will be the momentum in the global luxury wine market.

Bapcor has disclosed a conditional indicative offer from Bain Capital at $5.40 per share, a 23% premium to the 1-month VWAP. We expect the Board will view the offer as opportunistic and may not even allow due diligence at the prevailing offer price. Bapcor’s EBITDA margins are well below US peers and its own aspirations under the Better Than Before program. While Bapcor’s realisation of cost savings has clearly been delayed, the company still believes in the long-term potential for better profit margins. We place a 25% probability of a takeover proceeding for Bapcor. A successful takeover offer will require a price over $6.00 per share in our view and Board support.

Treasury’s site trip and our meetings in Paso Robles have highlighted the advantage Treasury has in this fast growing wine region. Treasury’s existing facilities combined with extra luxury wine supply at DAOU provides an underpinning for sales and EBITS growth in the Americas. The distinct advantage at Paso is its far lower cost of production. We expect the company to deliver on synergies and double-digit revenue growth from its luxury portfolio and investor confidence in the DAOU acquisition will grow following the trip.

Australia’s national accounts reveals that income growth remains strong and consumers are spending more money outside of retail. For the March 2024 quarter, household income rose 5.1% and total consumer spending was up 5.9%, whereas retail spending only rose 2.5%. Households are saving very little of their income, a reflection of stored up savings from the past four years, but also a reminder that consumers will be more value conscious. We expect similar trends to constrain a retail recovery in FY25e as households allocate spending elsewhere and lower retail price inflation dampens overall revenue.

Lovisa has extended its CEO contract for Victor Herrero to May 2025. John Cheston will be appointed as successor to take Lovisa at the start of FY26e. Mr Cheston comes from Premier Investments as Managing Director of Smiggle, overseeing its expansion into foreign markets over the last decade. With the change to CEO, we lower our Lovisa store rollout forecast in FY25 by 50 stores largely effecting the probability of an accelerated China rollout.

Australian retail sales rose 1.2% in April 2024. To adjust for the noise of the timing of Easter we also look at the combined March-April results which shows sales growth of only 1.3%. Department stores and fashion have had the most notable slowdown over the Easter trading period. Supermarket sales are also soft considering data suggests higher inflation in March-April. We forecast subdued retail sales growth trends to continue to June 2024, with a mild pick up for the back-half of calendar 2024.

Domino’s investor trip to Germany and France highlighted the role of online food aggregators is significant and partly explains the weakness in France and strength in Germany. Franchisee profitability can lift with higher order count which will be driven by product innovation and growth on the aggregators. While we are more positive, we have two notes of caution. Firstly, we expect the company to step back from the timelines for its long-term store growth and store growth may be 3%-5%, not 7%-9% per annum. Secondly, consensus expectations for sales growth and margin expansion need to be lowered over the next three years.

Australian supermarket volumes are likely to drop by 2% in FY24e on a per capita basis, which is a continuation of declines seen since March 2022. While higher food prices may explain some of the softness in volumes, other factors are at play including channel leakage, lack of store refurbishments and less new product innovation. We forecast 3.0% comparable sales growth for the supermarket sector in FY25e, but a downside case of 2.3% is possible if volumes continue to decline. A low rate of comp sales growth would be very challenging given comp cost growth is unlikely to fade. Weaker comp sales will put downward pressure on Coles and Woolworths profit margins.

This chart pack provides a range of insights about the online market in Australia including market size by category and penetration rates for a wide range of retailers. Three key insights from our analysis are – 1) Online retail growth is moderating, with the step down to single-digit growth impacting our forecasts for long-term share of sales. 2) Online retailers have shifted their focus to profitability, reducing the consumer appeal of online. 3) Amazon is continuing to take share from other marketplaces, now at 10% of all online retail in Australia.

The Australian Federal Budget is positive for retail given income tax cuts. However, there are very few other initiatives that shift the outlook for consumer spending. Power price relief helps, but it is at the margin. The tax cuts add 1.6% to household income in FY25e. However, evidence from past tax cuts shows it takes time for them to benefit spending. Treasury forecasts a 1% acceleration in consumer spending for FY25e compared with FY24e. We take the same view on retail spending and expect a 1% improvement in growth for FY25e, a modest upswing. We are near the low point of the retail cycle and tax cuts will help lift growth. Even so, sales growth is likely to be slower than cost growth.