Metcash reported a largely flat sales and EBIT result in 1H25. The stable result masks significant movement under the surface, with a good Food segment result, but weaker organic earnings in Liquor and Hardware. The path of Hardware EBIT margins will be the central debate on Metcash over the next 12 months. We estimate Hardware corporate store earnings fell 45% in 1H25, driven by a decline in sales. If Hardware is truly cyclical, then a meaningful recovery is likely. We take a more cautious stance.

Lovisa’s AGM trading update revealed weakening sales trends and a slower pace of net new store openings. We expect to see a year of slower store openings, influenced by the CEO transition period being so drawn out. Increasing competition and promotional activity weighs on margins.

JB Hi-Fi’s share price indicates the market has firm expectations that good earnings growth will continue. We explore some of the arguments trying to justify the lofty valuation. Electronics categories are not defensive. Price deflation is common and replacement cycles vary. Just under half JB Hi-Fi’s outsized earnings growth over the past five years is a function of market share gains that will be harder to sustain.

Accent Group will provide a trading update at its November AGM. Like-for-like sales growth for the first seven weeks of FY25e was 3.5%. We expect trends to have slowed slightly and forecast 1H25e like-for-like sales of 2.8%. We have included the recently announced distribution agreements to our forecasts.  We also consider peer commentary on gross margin and competitive behaviour.

Coles’ investor day last week kept the messages high level and consistent about its strategy with an emphasis on value, digital evolution and efficient execution. The focus was its online and distribution centre automated fulfillment. While Witron is clearly proven, for the Ocado CFCs, we expect the payback will be very long-dated. Coles recent capex projects will lift profit margins over the next two years. 

We have produced a chart pack with category forecasts for the Australian liquor industry reset (see PDF report). This liquor outlook provides two insights – 1) The weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. 2) The recalibration of liquor demand differs across categories, with wine and RTDs likely to see better demand from affordability and drinking preference. The data includes actual consumption trends for Australian households to the end of FY23.

Endeavour Group’s 1Q25 result showed weaker retail sales trends and indications that gross margins are coming under pressure. The company said that Retail segment EBIT margins will fall by 50-100bp in 1H25e. We expect weak sales trends to persist a little longer, but the problem isn’t structural. The company has increased discounting to improve sales, which has hurt margins, but is yet to help sales.

The ACCC has approved the merger between Sigma and Chemist Warehouse. We expect the issuance of new shares to Chemist Warehouse will not be until February 2025 at the earliest and could be in March 2025. For a brief period, the stock could have a float-adjusted market cap of $14 billion. By April 2025, the market will increasingly turn its attention to the fundamental earnings and valuation drivers. The most compelling feature is strong revenue growth of circa 10-12%, with more than half from store count growth. The greatest unknown is where sustainable margins settle.

Domino’s recently announced that Don Meij, CEO of the company for the past 22 years, will retire. The Board announced the appointment of Mark van Dyck, as CEO. He is an executive with experience at Compass Group and within the Coca-Cola system. Mr van Dyck presented a sensible approach to improving profit margins, but it will take time as improving franchisee profitability is a first-order priority in our view. 

Coles will host an investor day on 14 November 2024. The company will showcase its major capital projects undertaken over the past five years. Witron distribution centres are impressive and Ocado may actually work. The debate in our mind is whether any competitive advantage has been built. We doubt it. Coles margins should “pop” in FY26e as the capital projects deliver and implementation costs drop. However, the medium-term growth is modest and risks remain around a higher intensity of competition along with challenges in growing market share.