Australia’s population growth tends to be higher than other developed countries, supported by higher net migration. In Issue 8 of The Retail Mosaic, we analyse the impact net migration has on retail spending, which categories tend to benefit most and which retailers are best located for migration growth. We find that migrants tend to spend more on food and fashion. Retailers that are best located include Super Retail Group’s Macpac and Rebel Sport. JB Hi-Fi and Bunnings also have store locations that provide a greater contribution from population growth.

Metcash’s investor day made it clear that it is looking to accelerate growth. This growth will increasingly come from store openings and Metcash will need to spend more capex to facilitate the growth. The company is in a stronger position to grow given the profitability across the network and capability of management.

Australia’s national accounts highlights an improvement in income growth as the headwinds from higher interest rates and taxes eases back. For the December 2023 quarter, household income rose 4.3% and spending was also up 4.3%. We are seeing a gradual drop in the share retail has of total spending and has further to go in our view given outsized spending over the past four years.

Australian retail sales rose 1.2% for January 2024. Half of retail categories were in decline, including notable declines in furniture, electronics, footwear and recreational goods over the month. Trading updates from a number retailers highlight stabilisation in sales trends, but at a weak level of growth. We expect subdued sales trends to persist over the next four months.

Amazon’s latest Australian accounts show its market share gains are accelerating. In 2023, we calculate the online retailer had $5.8 billion in gross transaction value (GTV), which would account for one in $10 of all online spending by Australians. It could reach $10 billion in GTV over the next three years. While Amazon is winning share, we find that it is doing so rationally on price.

Harvey Norman’s 19% fall in 1H24 EBITDA is likely a trough in earnings. As sales stabilise, we forecast EBITDA to increase 4% in 2H24e. While sales should stabilise, we expect very modest growth in its two largest markets – Australia and NZ. Profit margins should improve, albeit margins are on track to be above pre COVID-19 levels by June 2024 limiting the pace of earnings growth over the next two years. One encouraging sign is reduced inventory in its franchising business. Inventory is back to pre COVID-19 levels.

City Chic’s 1H24 EBITDA was at the top end of the guidance range given in late January 2024.  While losses are starting to reduce and gross margins improve, the sales base is much smaller. We expect sales to stabilise around May 2024 and anticipate noticeable gross margin improvements. City Chic also outlined a range of cost saving measures to restore profitability that will show through in 2H24e.

Coles 1H24 results revealed a tight control on costs in its Supermarkets division and some easing of the headwind in stock loss. The retailer has started 2H24e strongly in its Supermarket business. While some of the momentum is likely to ease off, Coles should achieve market share gains in 2H24e. We also see further improvement in stock loss driving underlying EBIT higher in 2H24e.

Endeavour Group reported 1H24 sales up 2.5% and EBIT up 2.6%.  The company had an increase in gross profit margins and some cost savings to help offset higher operating cost growth. Weak sales trends in liquor are likely to persist throughout 2024 in our view as the industry resets volumes back towards more normal levels post the COVID-19 boom. While higher gross margins can be a red flag, Endeavour is holding market share and the cost savings embedded in 1H24 give us confidence in second half earnings.

Accent Group reported EBIT down 21%, but down 11% when adjusting for the extra week of trading in 1H23. Strong store rollout will drive an uplift in sales, recent gross margin improvements hold but costs growth remains elevated. The challenge for Accent Group is achieving positive comp sales while holding gross margin improvement to mitigate cost inflation, especially prevalent in wages and rents. Strong cash conversion and landlord contributions assisting new store rollout means a healthy dividend payout ratio can be retained.