Coles reported 1H25 EBIT up 5% with a stronger lift in its Supermarkets division of 7%. The company had solid sales trends, which partly reflected a benefit from Woolworths DC strikes. Underlying sales and EBIT growth in the Supermarket business is closer to 3%-4%. Cost savings and DC efficiencies are offsetting natural cost inflation, not boosting margins. Over the next 18 months, Coles will benefit from the unwind of transition costs that will lead to double-digit EPS growth.

Australian retail sales rose 4.0% in December 2024, with some notable outliers across segments. Electronics was up 11%, furniture up 8% and pharmacy up 7%. On the other hand, department stores, supermarkets, liquor and recreational goods were all very soft. Some of the shifts reflect the baseline with December compound annual growth rates actually slower than November for all categories other than hardware and liquor.

Australian retail sales rose 4.1% in November 2024. In non-food retail, sales were up 4.0%, while the CAGR growth over five years was 7.3%. November benefited from a bigger Black Friday event but also from warmer, drier weather. Supermarkets, liquor, fashion and cafes/restaurants all had much stronger growth. The sales trends have improved in recent months, which may be a little stronger than true trends because of favourable weather and the heavier discounts enticing shoppers. We expect some softness in the March 2025 quarter.

Australian retailers have had a good Christmas. Even with a bigger Black Friday, consumers were in the mood to spend at Christmas and a late surge in sales is likely to lead to good growth. Sales trends are likely to be at least 1% better than the September quarter. In addition to good sales, few retailers are complaining about margins. While sales growth has been good, margins are already high and cost growth is elevated.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.