Metcash’s acquisition of Superior Foods and two mid-sized hardware businesses is sensible and, in our view, best described as fairly priced. The upside in value for Metcash shareholders will come from realisation of synergies by FY26e, with potential value creation as Metcash builds scale in the foodservice and frame & truss sectors.
Australian inflation stepped down to 4.1% in the December 2023 quarter year on year. Our calculation of retail price inflation is at 1.9% for the quarter dropping back from 3.4% in the September quarter. The drop in inflation is negative for the revenue outlook in retail, particularly given retail volumes (including supermarkets) are also declining. However, the more rapid drop in broader inflation may help bring forward interest rate cuts and ease wage pressures a little in FY25e.
Woolworths’ trading update provided comfort that its core business in Australian Food is doing well, but Big W and NZ both have significant challenges that will take years and money to fix. Big W may close stores and NZ is more than three years away from decent margins in our view. The industry backdrop of government scrutiny and fading food inflation will mitigate expectations.
The Australian supermarket sector is under scrutiny given higher grocery prices. This report is written to give perspective about prices, profit margins and potential risk areas as the Senate inquiry is held over the next four months. Price increases in supermarkets largely reflect higher costs. However, retail prices have risen faster than the producer prices in fresh produce and red meat. Like almost all Australian businesses, supermarkets have faced higher costs and their profit margins are only slightly higher than pre COVID-19 levels.
Many Australian consumer companies are likely to report weak 1H24e results. However, they are likely to be better than consensus estimates with slightly better sales trends and higher gross margins in some cases. While earnings should be fine this half, share prices have run in anticipation of results and the trading updates and outlook commentary are likely to flag higher operating cost growth as a headwind.
Domino’s has delivered a post-market trading update highlighting very weak sales in Asia and slowing sales in Europe for 1H24e. The tone of the update also suggests progress, but not enough, on franchisee profitability. We expect it will take longer for store rollout to improve and as a result remain negative on valuation grounds.
The link provides a presentation associated with a webinar we held. The webinar addressed the updated outlook for retail sales and key drivers that could trigger an improvement in spending. In the presentation, we also address the outlook for interest rates, price inflation and online sales. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth. We also outline the challenging operating cost environment including higher wages and rents in the presentation.
Australian retail has had a difficult 2023 with below trend sales growth of 3.1%. We expect another challenging year with growth of 2.5% for 2024. While a weaker year, it will be a tale of two halves with softer growth in the January-June period and better growth for July-December. Moreover, we expect slowing sales in at-home food & liquor and a sharper slowdown in cafes, restaurants and takeaway food. We expect an improving rate of growth for non-food retail. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth.
We initiate coverage of footwear and apparel retailer Accent Group. The company has store rollout potential to grow by 240 stores in four years, or a 6.6% CAGR. Moreover, the evolving product mix contributes to higher gross margins as more vertically sourced product and more higher margin apparel goods are sold. However, the company is facing rising cost of doing business coupled with a period of slowing same store sales which puts pressure on margins in FY24e. The store network growth potential and gross margin gains will help lift margins in FY25e and more so in FY26e.
Super Retail Group provided a trading update highlighting that sales held up relatively well in 1H24 and gross margins were up slightly. Like many retailers, gross margins are proving to be a cushion to the weakness in sales and elevated cost growth. We lift our EPS forecasts by 7% in FY24e and 3% in FY25e. While a positive update, we expect sales trends to be soft from here and cost growth will outstrip sales growth for two consecutive years.
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