The RBNZ remains on hold while the RBA has already raised rates three times this year. New Zealand retail sales began recovering in the September quarter 2025 and the income backdrop remains good for NZ consumers despite the risk of higher inflation and interest rates. We forecast New Zealand retail sales growth to hold at 4.2% over FY27e, with 3.6% growth in at-home food & liquor and 4.6% in non-food retail. The retail sales cycle in New Zealand may be more uncertain in FY27e, but the long-dated impact of rate cuts is still a tailwind, along with improving net migration and employment growth. Key retailers that have earnings upside in NZ are Ampol, Woolworths and Harvey Norman. To a lesser extent, JB Hi-Fi and Nick Scali will see upside to earnings but both have a very small store network.

Sigma’s trading update revealed a small, but notable improvement in sales trends and an entry into the UK through a joint venture. Improved sales trends are a positive sign but the driver still appears to be GLP-1 drugs, resulting in margin dilution. The UK joint venture is small with five stores to be trialled in the Chemist Warehouse format in London.

Sigma reported 1H26 normalised revenue growth of 15% and EBIT growth of 19%. The sales result was strong but the modest operating leverage is a reminder of the inherently low gross margins in the business. Sales trends are strong but likely to slow from here. We expect LFL to remain double-digit in 2H26e, but then slip into single-digit territory for FY27e as the company laps higher growth and price inflation fades. Going forward, each 1% sales growth to translate into approximately 1.5% EBIT growth. Synergies will continue to help earnings over the next four years.

Sigma Warehouse reported its 1Q26 sales at its AGM. Chemist Warehouse like-for-like sales were up 14.7% for the quarter, an acceleration on FY25 trends. The company highlighted elevated sales of weight-loss drugs like Ozempic as a big contributor. We estimate the contribution is anywhere from 3%-5% of the LFL growth. We expect LFL sales to settle back at 11% in 2Q26e and 9.0% in 2H26e.

Sigma reported FY25 network sales growth for Chemist Warehouse of 14% and EBIT at $903 million, up 47%. The company reported a continuation of double-digit like-for-like sales growth with a lift in profit margins for the underlying Chemist Warehouse business. We forecast EBIT growth of 22% in FY26e ahead of revenue growth of 15%. Margins will be helped by penetration of Wagner private label, operating leverage from strong comp sales and the increasing synergies over the next four years.

New Zealand has been a challenging retail market for most companies over the past 18 months. However, there are clear signs retail sales are likely to improve. Rate cuts of 250bp that began in August 2024 are starting to boost incomes and recent sales trends have been stronger. We expect NZ retail spending to rebound to 3.6% growth in FY26e, up from 0.6% growth in FY25. The three retailers with the largest sales exposure and upside to better NZ sales trends are Ampol, Harvey Norman and Bapcor.  NZ could account for 2%-3.5% in operating profit growth for these companies.

The Sigma-Chemist Warehouse merger formally completed on 12 February 2025. This report provides our pro-forma updated forecasts and model for the combined entity. We also explore three bull and bear arguments on the stock given its lofty valuation still makes it difficult for us to have anything but a Sell rating.

Most retailers have highlighted how much tougher their NZ operations have been over the past year. The magnitude of the interest rate pain combined with lower levels of household savings has created a much tougher backdrop. However, conditions are improving and rate cuts have been significant with more to come. NZ retail sales should recover over 2025, more so in the second-half. We have pulled together a chart pack that provides a perspective on the NZ economic outlook, retail sales forecasts and financial performance of major retailers in that market. We include both ASX-listed retailers and NZ-centric retailers.

Chemist Warehouse has provided a trading update for the 1H25 results last week subsequent to shareholder approval of the merger with Sigma Healthcare. The 1H25 results are very strong with profit margins up 138bp (on network sales) in 1H25. What’s driving results? While not disclosed, we estimate more than half comes from higher gross margins with a benefit from the new Sigma supply agreement. We expect FY25e EBIT margins to be up 101bp. We now set our long-term EBIT margin for Chemist Warehouse at 8.2% of network sales compared with 7.4% previously. 

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.