JB Hi-Fi reported 1H25 sales growth of 10% and EBIT growth of 9%. Impressive top line growth was hampered by a decline in gross margins and elevated operating cost growth. While good sales trends should continue, the results provide a reminder that gross margin declines are a risk and operating leverage is low. The company’s large cash position does bode well for further special dividends. While dividends and cash flow are attractive to some investors, the valuation remains steep in our view. 

Nick Scali delivered a better than expected earnings result and the gross margin recovery since the AGM guidance was a standout. We see 2H gross margin holding flat on last year for ANZ, with group gross margins at 62.3% for FY25e. Initial signs of UK improvement and hints of greenfield expansion has seen confidence grow in the UK rollout. There is, however, now little room for error in execution.

Nick Scali’s AGM trading update revealed improving written sales order trends but highlighted the disconnect to recorded sales with 1H25e revenue for ANZ guided down 3%. Sea freight rate exposure has dented gross margins in the near term pushing 1H25e ANZ EBIT margins down to FY19 levels. The UK is set to reach profitability in 2H26e and saw gross margin improvement as new product is introduced to stores.

JB Hi-Fi reported FY24 EBIT down 16%. Sales momentum and margins were encouraging in the second-half and the company has consistently gained market share over the past five years. We expect another year of softening margins, albeit overall EPS should be up slightly in FY25e. While JB Hi-Fi is clearly a well-run business, we expect future earnings growth is likely to be low single-digit at best.

Nick Scali reported an EBIT result of $130 million for FY24, down 16%. Gross margin of 65.5% for the group and 66.0% the Australia and New Zealand (ANZ) division was a standout and record. For FY25e we expect to see modest store openings, an improvement in per store sales growth momentum from ANZ and moderate cost growth. A catalyst to the upside would be a lower sea freight rate environment and progress in the UK.

Australian retail sales for November rose 2.1%. Black Friday promotions drove improvements particularly in electronics, department stores and furniture. Online food and non-food were both positive, with online food strength growing double-digits. While there are concerns about a pull forward of sales into November, our feedback suggests December sales held up reasonably well.

Australian retail sales for October 2023 rose 1.3%. Category variability continued with dining out resilient and weakness in furniture, electronics and recreational goods. Supermarkets slowed as fresh deflation dented sales. The expectation of Black Friday sales in November likely gave consumers a pause during October in some discretionary categories. Our feedback on November sales and Black Friday have been stronger.

Coles reported underlying EBIT down 5% for 2H23 in its Supermarket division. The drop in profit margins was a function of both gross margin pressure from rising theft and higher operating cost growth. Unfortunately for the company, these trends will persist into FY24e leading to a drop in EBIT margins. FY24e should be a trough in earnings. However, margin expansion is largely contingent on its capex projects delivering a return and it may take 2-3 years to prove success on this front.

Premier Investments has provided a trading update that reveals that 2H23 sales rose 1.3% and Retail EBIT fell 2.2%. In light of a weaker backdrop it is a good result. The company has also announced a strategic review that could result in separation of Peter Alexander and Smiggle and release value in its franking credit balance.

Super Retail Group reported FY23 EBIT growth of 10%. For the second-half EBIT dropped by 4%. Sales trends have held up well so far and the company has reduced its inventory. However, conditions are likely to be more challenging over the next year. As a result, profit margins will fall. The company will also have rising overheads and costs associated with its loyalty program in FY24e.