Metcash reported FY23 EBIT up 8% and 2H23 EBIT up 5%. While there has been some concern about a drop in demand, Metcash has demonstrated good sales trends relative to industry growth in all its segments. The company may not buck broader industry trends going forward, but its valuation provides a margin of safety relative to peers.

Super Retail Group’s trading update to the end of April 2023 reveals good sales trends are persisting but margin pressure is starting to show through. Gross margins are falling and operating costs are rising. In our view, sales trends are propped up by inflation which we expect to dissipate in 1H24e. Moreover, operating cost pressure will continue in FY24e, making that the year of earnings normalisation. Super Retail’s upcoming strategy day should send some positive messages about growth opportunities, but capex could be higher and defer any major capital management.

Endeavour Group reported 1H23 EBIT growth of 16%. The result was characterised by a strong increase in profit margins in Hotels and good cost control in its Retail segment. However, when we look at performance from 1H20 to 1H23, operating cost growth has outstripped revenue growth in both Retail and Hotels. Cost growth will remain a headwind in our view over the next two years. Another unknown for investors is higher capex (or opex) associated with Endeavour’s technology transition over the next four years. We expect very limited earnings growth over the next two years as operating cost growth limits margin expansion.

Coles reported FY22 EBIT of $1,869 million, down 0.2%. The result had some lower quality features to deliver net profit growth including low deprecation growth, a lower tax rate and the unwind of some provisions. We expect Supermarket and Express to see an improvement in EBIT margins in FY23e. The unwind of COVID-19 costs is the most significant driver, accounting for well over half the earnings growth.

Metcash reported FY22 sales of $17.4 billion and EBIT of $472 million. Adjusting for the 53-week in FY22, sales rose 4% and EBIT rose 16%. The results reflects higher price inflation across all divisions and a mix-shift towards the Hardware division, which has higher margins. Metcash has been able to hold onto much of its customer gains made during COVID-19. While we expect a lack of EPS growth over the next two years, the company’s competitive position has improved in each division.

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.

Wesfarmers reported a 12% fall in 1H22 EBIT. While the company flagged a drop in group earnings, the fall in Bunnings earnings and higher cost growth raises concerns. We expect earnings to fall in 2H22e as well. The bigger picture is Wesfarmers is lapping very strong earnings across its retail businesses from FY21. We are not concerned about price inflation creating a headwind because Wesfarmers operates in rational markets. However, higher operating costs are likely, including additional investment in digital capabilities as the company competes for a more viable position online.

We initiate coverage of Harvey Norman. The company’s earnings have benefited from elevated demand and tight cost controls over 2020 and 2021. Earnings will fall over the next three years, but we expect margins to remain higher than pre-COVID-19 levels given market structure, store rollout and cost management. In Australia, we expect margins to remain firm given the more concentrated market structure, tight product supply and stringent control on costs the company has maintained over the past two years. The company’s sprawling retail network overseas now accounts for one-quarter of its group earnings and with further rollout in each major country, its share of earnings will rise over the next three years. Offshore stores will rise from 107 today to 121 by FY24e.

Wesfarmers reported FY21 EBIT up 18%. However, Bunnings and Kmart earnings are likely to fall in FY22e given lockdowns and a normalisation in demand. These two businesses account for over 80% of group earnings. The company also flagged investment in its “digital ecosystem”. We expect elevated capex to persist as Wesfarmers catches up in online. There is upside risk to capex projects as IT and supply chains may need to change if online penetration becomes meaningful.