City Chic reported an FY24 pre-AASB 16 EBITDA loss of $19 million, an $8 million smaller loss than in FY23. This was a beat to the guidance of -$22 million provided at the time of the capital raising in June 2024. City Chic’s trading update showed positive comparable sales up 9.9% and further, provided revenue guidance of $142 to $160 million for FY25e.

Lovisa reported FY24 EBIT of $128 million, up 21%. Sales of $697 million, up 17.3% were a 2% miss to Visible Alpha consensus. The comparable sales trading update at 2.0%, while an improvement on 2H24 was lower than consensus expectation. Sales on a per store basis in A$ were lower across all segments. The gross margin performance was a highlight, delivering 81.2% in 2H24 and 80.9% for the full year, up 108bp. Elevated costs, especially wages and rents, suggest there is little operating leverage being realised so far.

Accent Group reported FY24 EBIT of $128 million, adjusted for impairment, down 1% against a 52-week comparable. The trading update of like-for-like sales of 3.5% was a slowdown on the 4.1% achieved in 2H24. A lower 2H24 gross margin, explained by an inventory write-down, was in contrast to the 136bp gross margin improvement in 1H24. Given positive trading momentum, structural gross margin improvement strategy and the exit of underperforming banners and sites we see Accent Group growing earnings by a 9.5% CAGR over the next 3 years.

Super Retail Group reported FY24 EBIT of $400 million, which was down 9% year-on-year, but up 57% on FY19 levels. This represents a compound annual growth rate of 9%. Given sales trends are starting to improve EBIT should also start to rise. The question is how much. We expect LFL sales to remain between 1%-3% and EBIT margins will be largely steady. Increased competition in auto keeps us cautious about group profit margin expansion. The company’s FY24 EBIT margin of 10.3% is about 80bp higher than FY19 supported by higher gross margins.

Reporting season across the retail, food & beverages sector is likely to highlight the resilience of profit margins for FY24e, despite weak sales. The strength of margins is a function steady gross margins and cost reductions. While good news, consensus expectations already reflect this outcome. We are above consensus on Inghams and Woolworths and below on Lovisa for FY24e EPS. We expect trading updates to influence share prices meaningfully with the risk that FY25e consensus needs to be downgraded for many. We are below FY25e consensus on Bapcor, Premier Investments, Super Retail Group and Wesfarmers.

The spike in spot sea-freight rates is likely to remain topical over the next few months and add to concerns about retail profit margins in FY25e. Our feedback is that spot sea freight rates for Australian importers are now close to 3x the low point seen only 12 months ago. The good news is many retailers have 12-month contracts. The bad news is that it looks like a step-up in freight rates is coming either way as we move through FY25e and adds risk to earnings. The retailers most exposed to higher sea freight rates are Nick Scali, Wesfarmers and Super Retail Group.

We have written a detailed report on Lovisa, a global, affordable, fast fashion jewellery retailer with a strong growth opportunity. We forecast the store network to grow at a compound annual growth rate of 15% over the next four years with stores in existing and new markets. EBIT is forecast to grow at 23% annually over four years in our base case. 

We initiate coverage on Breville group, a global kitchen appliance developer that has achieved very strong sales growth in recent years, particularly in the coffee category. After a soft FY24e, we expect solid sales growth to resume in FY25e and beyond with household penetration, new markets and new products all supporting sales growth of 6%-9%. While gross margins should also expand, the company will need to invest in advertising and product development to sustain momentum.

Australian retail sales rose 1.2% for January 2024. Half of retail categories were in decline, including notable declines in furniture, electronics, footwear and recreational goods over the month. Trading updates from a number retailers highlight stabilisation in sales trends, but at a weak level of growth. We expect subdued sales trends to persist over the next four months.

City Chic’s 1H24 EBITDA was at the top end of the guidance range given in late January 2024.  While losses are starting to reduce and gross margins improve, the sales base is much smaller. We expect sales to stabilise around May 2024 and anticipate noticeable gross margin improvements. City Chic also outlined a range of cost saving measures to restore profitability that will show through in 2H24e.