JB Hi-Fi reported a very strong 1Q23 sales trading update, which was elevated given the period lapped lockdowns last year. The three-year average growth rates are mid to high single digits reflecting sustained consumer demand and support from both price inflation and mix. We expect sales momentum to slow in 2Q23e as the company laps a more normalised sales base. We forecast 2Q23e comp sales for JB Hi-Fi Australia at 4.4% and The Good Guys at 3.3%. Given we expect a sales slowdown from here, we are more cautious on the stock.

Wesfarmers reported a 12% fall in 1H22 EBIT. While the company flagged a drop in group earnings, the fall in Bunnings earnings and higher cost growth raises concerns. We expect earnings to fall in 2H22e as well. The bigger picture is Wesfarmers is lapping very strong earnings across its retail businesses from FY21. We are not concerned about price inflation creating a headwind because Wesfarmers operates in rational markets. However, higher operating costs are likely, including additional investment in digital capabilities as the company competes for a more viable position online.

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.

Wesfarmers reported FY21 EBIT up 18%. However, Bunnings and Kmart earnings are likely to fall in FY22e given lockdowns and a normalisation in demand. These two businesses account for over 80% of group earnings. The company also flagged investment in its “digital ecosystem”. We expect elevated capex to persist as Wesfarmers catches up in online. There is upside risk to capex projects as IT and supply chains may need to change if online penetration becomes meaningful.

We initiate coverage of Super Retail Group. The company may have a challenging six months over the remainder of 2021 given lockdowns and a very high base from 2020. Fundamentally, the company has lifted its online penetration, increased its loyalty cardholder base and reduced discounting. These changes all support higher EBIT margins medium term. Moreover, the balance sheet is net cash.