Endeavour Group’s 1Q25 result showed weaker retail sales trends and indications that gross margins are coming under pressure. The company said that Retail segment EBIT margins will fall by 50-100bp in 1H25e. We expect weak sales trends to persist a little longer, but the problem isn’t structural. The company has increased discounting to improve sales, which has hurt margins, but is yet to help sales.

Endeavour’s share price has dropped 10% in the past quarter. Our take is the share market is concerned about the outlook for liquor industry demand and the transition to a new CEO. We address the liquor industry outlook in this report and find that the weakness in sales is more a function of the COVID-19 spike in demand than a structural concern. We expect retail liquor sales to improve meaningfully by June 2025 and support better earnings for Endeavour. 

Coles reported 1Q25 supermarket sales trends slightly ahead of Woolworths. The bigger debate is whether Coles has achieved the result with less price investment. The short answer is yes, but not in a way that will protect Coles sales or margins in future. Overall growth is weak for both retailers with broadening competition for groceries in Australia. Coles decision to build another Witron DC in Victoria is logical but the cost increase suggest the return on capital may be lower than the first two DCs it built.

Coles reported underlying EBIT up 5.7% for FY24 on a 52-week basis. EBIT growth in Supermarkets was much stronger in the second-half but Liquor earnings fell significantly. Coles had a step-down in sales trends in 2H24 and these are likely to continue. The gross margin gains from lower stock loss in FY25e should underpin a flat EPS year with better EPS growth in FY26e as the benefits of the Witron and Ocado capex projects comes to fruition.