Peter Alexander is a high margin, cash generative business. However, we anticipate a sales deterioration and gross margin drop at Smiggle in FY26e, and think Smiggle will be breakeven, contributing little to our FY26e Premier Investments EBIT forecast. We have lowered our Smiggle store network forecasts, lifted operating costs but also raised gross margin expectation on favourable currency moves.

The Fair Work Commission has announced a minimum wage increase of 3.5% for FY26e. With a further 0.5% increase in superannuation payments, retail wage rate growth will be 4.0% in FY26e. This will be challenging for most retailers to offset given sales growth is likely to be 2%-3%. The retailers with the biggest challenge include Woolworths, Coles, Accent Group and Bapcor.

The Australian retail sector imports a significant portion of products from offshore, particularly in non-food categories. In most cases, these goods are purchased in a foreign currency, which means currency volatility can impact the cost of goods and retail profits. In Issue 9 of Price Watch, we analyse the impact that changes in the Australian dollar against the US dollar (AUD/USD) can have on retail prices and profitability. A fall in the AUD/USD typically impacts retail prices with a six-month lag.

The link provides a presentation associated with a webinar we held. The webinar addressed the updated outlook for retail sales and key drivers that could trigger an improvement in spending. In the presentation, we provide an update on the outlook for retail sales, covering feedback on recent trading and expectations for FY25e. We will address which categories have the best potential for volume recovery and how they are navigating price disinflation. We will also address the risk from interest rates on retail. The presentation also includes insights about retailer profitability, inventory levels, and expectations for retail trading at the FY24e results in August.

Australian retail has had a challenging 12 months. We expect we are past the worst for this sales cycle with a gradual improvement in growth over the next 12 months. We forecast retail sales growth of 2.9% in FY25e, up from 1.8% in FY24e. The sectors likely to see the strongest recovery are household goods, supermarkets and online. Some categories are still vulnerable to a correction in volumes such as liquor, cafes & restaurants and fashion. While there is an upswing, it will be mild and leave growth rates below trend for the next three years in our view given the low household savings rate and decelerating population growth.

Premier Investments provided a trading update to say that its first 12 weeks of FY23e has seen sales up 43%. These growth rates lap lockdowns from last year and are distorted. Nevertheless, underlying demand is strong as consumers have ramped up fashion spending. We expect sales growth to slow to very low single-digit from November onwards and sales are likely to decline in 2023.