Endeavour’s share price has dropped 10% in the past quarter. Our take is the share market is concerned about the outlook for liquor industry demand and the transition to a new CEO. We address the liquor industry outlook in this report and find that the weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. We expect retail liquor sales to improve meaningfully by June 2025 and support better earnings for Endeavour. 

Reporting season across the retail, food & beverages sector is likely to highlight the resilience of profit margins for FY24e, despite weak sales. The strength of margins is a function steady gross margins and cost reductions. While good news, consensus expectations already reflect this outcome. We are above consensus on Inghams and Woolworths and below on Lovisa for FY24e EPS. We expect trading updates to influence share prices meaningfully with the risk that FY25e consensus needs to be downgraded for many. We are below FY25e consensus on Bapcor, Premier Investments, Super Retail Group and Wesfarmers.

JB Hi-Fi may have reported a solid FY23 result, but the second-half provides an indication of the challenges ahead. Its 2H23 sales fell 0.5% and EBIT was down 23%. We expect sales to drop 3.0% in FY24e with EBIT down 26%. The risk to gross margins is the key unknown from here in our view. Even though JB Hi-Fi’s inventory is clean, there is elevated inventory with some suppliers and retailers. We expect EBIT margins to revert to FY19 levels by FY25e. The prospects for capital management look slim given higher working capital and capex.

Super Retail Group’s strong 1H23 result was accompanied by accelerating sales in its January 2023 trading update. Can the company buck the broader macro trend where signs of slowing sales are emerging? It’s unlikely in our view. Fading inflation and a peak in domestic tourism make it likely there is a sales slowdown by mid-year. Super Retail’s gross margins are likely to drop as sales slow even though it has some cost reductions in sourcing and sea freight.

Treasury Wines reported a mixed 1H23 result. Underlying sales were weak, but profit margins improved significantly. The Franks Family acquisition contributed almost two-thirds to its EBITS growth. The company needs to lift its marketing and promotional investment in 19 Crimes to stabilise revenue. Gross margin improvement was significant in 1H23 and reflects the acquisition as well as reduced supply chain costs. We expect COGS improvements to be more meaningful in FY24e as grape costs fall.

PE ratios are depressed across consumer stocks reflecting concern about an earnings decline. However, bears will need to wait at least another six months for evidence. FY22e earnings are likely to surprise on the upside for just about all retailers, trading updates will be strong and inventory should be down on February levels. It’s less clear cut how stocks will react, but any downturn is unlikely to be evident.

JB Hi Fi reported a good 1H22 result given the very elevated base from the prior corresponding half. Given its update in mid-January 2022, the new insights from the release showed solid January 2022 sales trends and a good gross margin result in The Good Guys. We expect stable sales and continued healthy gross margins to result in a fade in earnings rather than a fall off the cliff over the next two years. JB Hi-Fi also announced an off-market buyback of $250 million. We expect the company to continue holding a net cash position at the end of FY22e even after the buyback.

As key states of Australia emerge from lockdowns, we expect sales trends to improve for JB Hi-Fi. The demand for key categories like TVs, whitegoods and small appliances is likely to be strong. More importantly, with some tightness of supply, we expect gross margins across the electronics industry to remain firm in the medium term, particularly for The Good Guys. JB Hi-Fi has the added flexibility of a net cash position.

We initiate coverage of Super Retail Group. The company may have a challenging six months over the remainder of 2021 given lockdowns and a very high base from 2020. Fundamentally, the company has lifted its online penetration, increased its loyalty cardholder base and reduced discounting. These changes all support higher EBIT margins medium term. Moreover, the balance sheet is net cash.

We initiate coverage on JB Hi-Fi. In our research report, we assess the sustainable earnings base. JB Hi-Fi has won market share, which has supported operating leverage. The majority of the gross margin gains in The Good Guys are likely to stick given both an improved sales mix and better bargaining with suppliers. The company also has a net cash position providing it with opportunities for growth or capital management.