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The Retail Mosaic Issue 7

What is truly defensive in retail? Revenue, cost and share price perspective

15 September 2023

Retailers and investors perceive certain retail categories as defensive. Typically, the implied definition of defensiveness centres around the stability of demand, as measured by volumes. However, this perspective is far too narrow given the impact price and cost structures can have on a retailers’ profitability. In Issue 7 of The Retail Mosaic report, we analyse the volatility of volumes, price and dissect the cost structures of the retailers. We also analyse the share price volatility of retailers. Moving beyond just volume as the measure of defensiveness reveals a very different list of companies that are truly defensive. The most defensive retailers, taking into consideration, revenue, earnings and share price are Premier Retail, Wesfarmers, Woolworths and Bapcor.

Stealing profits

Understanding the issue of retail theft in Australia

11 September 2023

Retail theft is reducing retail profits. Crime losses amount to 1.3%-1.4% of sales, or $4.5-$5.0 billion, across Australian retail. The issue has ramped up globally over the past year, with some of the increase year-on-year simply a return to normalisation post COVID-19. Reported Australian east-coast retail crime for FY23 is only up 2% on FY19 levels. The drive towards self-checkouts has exacerbated crime rates and retailers with challenges, like Coles, need to implement changes. As economic conditions tighten, crime rates may rise and prevent Coles from achieving any discernible margin recovery in FY24e in our view.

National Accounts for June 2023 quarter

More people around to spend money

08 September 2023

The Australian National Accounts for the June 2023 quarter revealed that wages growth remains very strong and, despite a range of headwinds, households still want to spend their money. They continue to tap into stored-up savings to sustain spending habits. Wages grew 9.2%, disposable income only rose 2.1% and consumer spending was up 7.8%. The Australian economy is also benefiting from population growth of 2.4%, which should remain above trend for another 12 months. The headwinds for household will continue and retail spending is likely to remain weak give both a squeeze on living costs and a desire to spend elsewhere outside of retail. This weakness is likely to be most acute in calendar 2023, but we may not see a meaningful improvement in retail sales growth till 2025.

Costa Group (CGC) 1H23 result analysis

Produce Pressures Purchase Price

05 September 2023

Costa Group reported overall EBITDA up 7% in 1H23, with International EBITDA up 43% and Produce EBITDA down 53%. The weakness in Produce earnings reflects poor price realisation and rising costs. While conditions may improve slightly in 2H23e, it is more a FY24e and FY25e debate about the normalisation of citrus quality and pricing.  The earnings drop impacts the bargaining power of Costa with Paine Schwartz (potential suitor).

City Chic (CCX) - FY23 result analysis

Trimming sales

05 September 2023

City Chic had an incredibly challenging FY23. Sales declined and gross margins were crushed. The company made an EBITDA loss (pre AASB-16) of -$35 million for the continuing business.  However, there is light at the end of the tunnel. The sales decline should abate by the end of 1H24e. The company has a net cash position and a clear path to profit margin recovery over the next three years.

Harvey Norman Holdings (HVN) - FY23 result analysis

Decline not over yet

05 September 2023

Harvey Norman reported a large drop in 2H23 earnings with EBITDA down 29%. The fall reflected lower sales and significant operating leverage.  An increase in its licence fees for offshore masked a larger fall in Franchise segment margins. Given declining sales likely in 1H24e, we expect EBITDA to drop further. With a declining sales and earnings backdrop, combined with devaluations of its property book, we remain cautious.

Australian retail sales for July 2023

A broad-based slowdown

04 September 2023

Australian retail sales grew 1.4% for July 2023 on the prior corresponding period. The detail provided by the ABS showed very weak sales in electronics, furniture and recreational goods. Non-food online was likewise soft. Some of the growth categories have also eased back, such as supermarkets and restaurants & cafes. The downturn is broadening and we are likely to see further weakness in retail spending over the next six months.

Wesfarmers (WES) FY23 result analysis

Managing the cycle well so far

28 August 2023

Wesfarmers reported FY23 group EBIT of $3,863 million, growth of 6%. The result showed some signs of slowdown in the second half where retail EBIT only rose 2%. We expect sales to slow from here given recent trends and weakness in discretionary income for consumers. The company will cut costs and the margin pressure should be modest, but it will still be challenging to grow retail earnings in FY24e. The WesCEF business could see a drop in EBIT of 17% on our estimates. The core business will suffer a larger drop, but lithium earnings will start from 2H24e onwards.

Domino's Pizza (DMP) FY23 results analysis

Cost outs to drive earnings

25 August 2023

Domino’s FY23 EBIT of $202 million is likely a trough given the company’s cost saving program. While pleasing, the lingering concern we have is focused on is weak franchisee profitability, which will limit new store openings. Moreover, Domino’s balance sheet may avoid any major capital raising, but it is also constraining support for franchisees when compared with offshore peers.

Woolworths (WOW) FY23 result analysis

Margin deliverance

25 August 2023

Woolworths reported FY23 sales up 6% and EBIT up 16% and the result  was characterised by a return to more normal trading patterns. EBIT was up 3% excluding the impact of an unwind of COVID-19 costs in the prior year. The Woolworths Food division had a strong improvement in margins, which bodes well for FY24e and its investments in adjacencies is supporting higher margins than major peer Coles. We expect elevated capex to continue over the next two years given supply chain investments, which should deliver a return.

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