Treasury Wines update on its Penfolds division highlights the confidence the company has in the long-term global demand for its luxury wines. The company has lifted key product prices by 6% and will have more luxury wines to sell by FY26e under Penfolds Bin & Icon labels. The biggest swing factor for long-term earnings growth in this business will be the momentum in the global luxury wine market.

Australian supermarket volumes are likely to drop by 2% in FY24e on a per capita basis, which is a continuation of declines seen since March 2022. While higher food prices may explain some of the softness in volumes, other factors are at play including channel leakage, lack of store refurbishments and less new product innovation. We forecast 3.0% comparable sales growth for the supermarket sector in FY25e, but a downside case of 2.3% is possible if volumes continue to decline. A low rate of comp sales growth would be very challenging given comp cost growth is unlikely to fade. Weaker comp sales will put downward pressure on Coles and Woolworths profit margins.

Coles reported 3Q24 comparable sales growth of 4.2% for its Supermarkets. It was a good quarter for Coles. However, we expect it is a peak in growth with some transitory factors and fading inflation leading us to forecast 2.5% comparable growth for 4Q24e. Liquor had a much weaker period and sales declines are likely to continue as the industry volumes reset lower and Coles unwinds some loss-leading sales.

We expect signs of slowing sales, which reflect weak volumes and decelerating inflation. For Coles, we forecast 3Q24e Supermarket comp sales growth of 4.3%. We estimate Woolworths Food comps to rise by 1.5% and for Endeavour Retail we forecast comp sales to increase by 0.7%. While the differential in growth rates will be of interest, the bigger concern for the retailers is the continued weakness in volumes. Inflation is set to slow from here and comp sales growth could be even weaker in 4Q24e, which is a challenge for the retailers given cost growth remains far higher.

Domino’s strategy day addressing its Australia/NZ and Asia segments reinforced its long-term ambition for growth. While Australia/NZ is performing well, Japan has challenges because too many stores have been opened too quickly. The issue of franchisee profitability was raised and structural challenges in Japan, Taiwan and France acknowledged by management. As a result, investors should brace for lower store growth including a lowering of the medium-term targets. Store growth of 4%-6% is more realistic than the current 7%-9% target.

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 also address the outlook for interest rates, price inflation and population growth. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel and automobiles will all limit the upside in industry sales growth. The presentation also includes insights about retailer profitability, inventory levels, and sales trajectory following results from the 6 months to December 2023.

We have updated our retail sales outlook, with modestly higher forecasts for 2024. We forecast 2.7% growth (up from 2.5% previously). We have lifted our non-food forecasts, but lowered food & liquor forecasts. The prevailing sales trends are very soft but should improve in the back-half of calendar 2024 as income tax cuts flow through. We only see a modest pick up because lower retail price inflation will constrain overall sales growth in FY25e.

Premier Investments reported 1H24 Retail EBIT down 4.8% to $210 million. Gross margins were higher than expected and along with tight cost control, helped to offset the operational leverage of declining sales. We expect a similar outcome in 2H24e with sales only up 1% and elevated cost growth leading to lower EBIT. Little detail was provided on the strategic review with a potential split up of the business possible in 2025.

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 also address the outlook for interest rates, price inflation and online sales. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth. We also outline the challenging operating cost environment including higher wages and rents in the presentation.

Australian retail has had a difficult 2023 with below trend sales growth of 3.1%. We expect another challenging year with growth of 2.5% for 2024. While a weaker year, it will be a tale of two halves with softer growth in the January-June period and better growth for July-December. Moreover, we expect slowing sales in at-home food & liquor and a sharper slowdown in cafes, restaurants and takeaway food. We expect an improving rate of growth for non-food retail. While tax cuts will help sales later in 2024, lower retail price inflation, higher unemployment and a shift of spend to travel will all limit the upside in industry sales growth.