Lovisa reported FY24 EBIT of $128 million, up 21%. Sales of $697 million, up 17.3% were a 2% miss to Visible Alpha consensus. The comparable sales trading update at 2.0%, while an improvement on 2H24 was lower than consensus expectation. Sales on a per store basis in A$ were lower across all segments. The gross margin performance was a highlight, delivering 81.2% in 2H24 and 80.9% for the full year, up 108bp. Elevated costs, especially wages and rents, suggest there is little operating leverage being realised so far.

Australia is an open economy and over the past twenty years, its retailers have increasingly imported consumer goods. In Issue 4 of The Retail Mosaic, we explore the extent of imports by retail category, the significance of China in supplying goods and exposure various companies have to direct imports from China. China provides the most efficient source of production and for many companies represents more than 70% of their offshore sourcing. The risk is that any increase in costs, supply disruptions or trade tensions could impact sales and margins. The companies sourcing most of their goods from China are Wesfarmers, City Chic, Woolworths, Premier Investments and Super Retail Group.

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.