Australian retail sales rose 5.8% in January 2022. The detailed breakdown shows smaller retailers did well and all household goods categories lapped strong growth. Liquor, takeaway food and department stores all reported a sales decline.  As COVID-19 cases have fallen, spending has improved in February 2022. We expect accelerating price inflation to further support sales growth. We forecast retail sales growth of 3% in 2022, on top of 5% in 2021 and 7% in 2020.

The Australian consumer has exited lockdowns in a strong financial position. In the December 2021 quarter, household income grew 5%, which is better than long-term trends and the savings rate was 14% of income. We estimate households have $200 billion in excess savings to fund holidays and a return to normal spending patterns. This bodes well for a soft landing in retail sales for 2022.

Harvey Norman delivered a solid 1H22 result with sales down 6% and profit before tax down 21%, excluding property revaluations. Earnings improved in the final two months of the half as lockdowns eased. The company has good control on costs and inventory levels are lean, but not short. We forecast FY22e PBT down 15%, which implies a smaller 2H22e earnings decline.

Domino’s reported a 6% drop in EBIT despite 11% sales growth in 1H22. The company saw a decline in SSSg for Japan and some disruptions in Australia/NZ. Domino’s noted that Japan sales are rebasing lower, which will lead to lower sales growth through to September 2022 in our view. Our key observation from 1H22 result was cost growth running ahead of sales growth. Such growth was outsized and if it continues will dampen margins across FY22e.

Woolworths reported sales up 8% but EBIT down 11% in 1H22. Even though COVID-19 disruptions added costs, underlying cost growth was also elevated, which we attribute to higher online sales. The company noted that food inflation had accelerated 2%-3% in early 2022, which is a good sign for earnings. We expect Woolworths to proactively work on lowering costs over the next two years.

Coles reported 1H22 EBIT down 4% to $975 million. The company has managed costs well and stabilised market share in Supermarkets, while growing share in Liquor.  We expect sales and earnings to improve in 2H22e, driven by higher food inflation. We estimate an acceleration of 150bp in packaged grocery inflation. Note there will still be a headwind to earnings in Liquor from rising costs and in Express as tobacco sales fall.

Endeavour Group reported 1H22 EBIT of $556 million, up 3%. The result was driven by gross margin gains in the Retail business. The company also did a good job in managing costs given the disruptions from COVID-19 during 1H22. We expect most of the gross margin gains seen in recent years to be retained, particularly given the growth of Pinnacle Drinks. However, we are cautious about the performance in FY23e. Overall, we forecast FY23e EBIT growth of 4%, which comprises a 9% fall for Retail and 37% EBIT growth in Hotels.

Costa reported FY21 EBITDA growth of 11%, or 4% excluding acquisitions. The company had lower prices in avocados in 2H21, but berries and mushrooms had a good second-half. There should be strong EBITDA growth in FY22e given acquisitions, tomato production expansion and a recovery for grapes. We forecast FY22e EBITDA of $265 million, up 21%. However, with changes to its lease structure, we only forecast 6% NPAT growth.

Inghams reported EBITDA of $222 million for 1H22. This was a decent result with flat margins despite headwinds from lockdowns adversely impacting the channel in the half. Unfortunately, COVID-19 disruptions will be more impactful on earnings in 2H22e. We estimate 2H22e EBITDA of $171 million down 26%. The impact from staff absenteeism, an adverse sales mix and oversupplied wholesale market all make for a difficult half. However, the issues should be transitory and if COVID cases continue to fall, earnings should improve from April 2022 onwards. We expect a recovery in FY23e.

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.

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Chart: Sales for online retailers for 12 months to December 2021

Sales for all only represent Australian online sales. We exclude Woolworths NZ as we focus on purchases by Australian residents. Source: Company reports, MST Marquee