Australian retailers have had a decent Christmas in 2023, particularly compared with low expectations amongst retailers and investors. Supermarkets traded solidly and electronics demand improved from very weak levels. Liquor and apparel are still trending at very low rates of growth. There is consensus upgrade risk to retailers, particularly Harvey Norman and Super Retail Group. While sales trends are slightly better, the strength of gross margin is the most significant driver of better earnings. The retailer where feedback has shifted most positively is Harvey Norman.

Australian consumers appear to be in the mood to celebrate Christmas and retail spending is likely to be better than “feared” by many this year.The lead-up before Black Friday was soft, but Black Friday promotions stirred up demand and the ramp into Christmas is likely to be sufficient to lead to better than consensus outcomes. We see upside risk to earnings for 1H24e for Super Retail Group, City Chic, JB Hi-Fi and Wesfarmers. While near-term earnings upside exists, we remain cautious because the path over the next two years is challenging with sales growth likely to remain below cost growth.

We are approaching the most important time of year for retailers where a successful festive season can make or break the year. For 2023, retailers are planning bigger and earlier events in November. Black Friday sales are likely to pull forward spending yet again. We expect the most noticeable boost to sales in electronics and recreational goods where supply has improved. While there is upside risk to consensus sales for 1H24e, the challenge will be profit margins. We are more cautious on margins and see a downside skew to risks given earlier discounting by retailers.

We expect Christmas retail sales to surprise on the upside with a partial offset in lower profit margins. The strongest feedback comes from department stores, electronics and supermarkets. However, not all have done well. Off-premise liquor looks to be in decline and womenswear feedback is weak.

Australian retail is setup for a good Christmas this year. The growth rates leading into Christmas has been far stronger than last year and while supply chains are not seamless, they are functioning better. Our feedback indicates low single digit sales growth for many with some stronger anecdotes. Given the timing of Omicron last year, sales feedback should strengthen further into Christmas and January 2023. We expect strong trading to lead to upside risk in near-term earnings for retailers.

It’s shaping up to be a great Christmas for Australian retailers, but the share market remains cautious. Sales feedback is positive. Margins are likely to surprise on the upside. We are hearing strong feedback in appliances, apparel and footwear. Given November-December can be more than one-third of annual earnings, there is upside to consensus expectations for FY22e in our view. While sales look good, investors are nervous about buying into a peak in retail earnings.