Woolworths reported FY22 EBIT down 1%. However, 2H22 was encouraging with EBIT up 8%. Australian Food had higher gross margins and improved cost management. Food inflation remains a tailwind for sales and earnings. We expect a tough 1Q23 in sales for Australian Food but then a recovery, and profit margins should rise substantially this year given lower COVID-19 costs and gross margin gains. There are partial offsets from weaker EBIT in NZ which is largely COVID-19 related and much higher overheads.

Coles reported FY22 EBIT of $1,869 million, down 0.2%. The result had some lower quality features to deliver net profit growth including low deprecation growth, a lower tax rate and the unwind of some provisions. We expect Supermarket and Express to see an improvement in EBIT margins in FY23e. The unwind of COVID-19 costs is the most significant driver, accounting for well over half the earnings growth.

Premier Investments 1H22 result was well flagged. The more interesting perspectives are that its gross margin remains high and rents are resetting as a lower share of sales. Sales trends so far in 2H22e are solid, which should provide EBIT growth in the half. The major share price driver for Premier from here is likely to be the ways it utilises its net cash position.

City Chic has a strong sales growth outlook but profit margins are likely to remain near current levels. Premier has a modest sales growth outlook from here and profit margins may fall. However, we see optionality given the company’s balance sheet. Premier may accelerate Peter Alexander store rollout, acquire a controlling stake in Myer or acquire a fashion business in youth apparel or accessories.

Inghams has provided a business update highlighting the challenges given exploding COVID-19 cases in Australia over the past four weeks. While little financial detail was provided, we have lowered our EBITDA by $67 million to $413 million in FY22e. About two-thirds of the downgrade relates to COVID-19, the remainder is higher feed costs, which is an ongoing concern given recent spot prices are up double-digit. The company will provide more detail at its results in late February 2022.

Wesfarmers trading update provides a reminder about the challenges facing the retail-centric company. Kmart’s earnings fell 56% in 1H22e on a sales decline of 10%. The fall in earnings suggests higher costs, some of which will persist as global supply chains become more expensive and online grows as a share of sales. While Kmart had a tough half, Bunnings earnings may have only fallen slightly and WesCEF was up.

We initiate coverage of Harvey Norman. The company’s earnings have benefited from elevated demand and tight cost controls over 2020 and 2021. Earnings will fall over the next three years, but we expect margins to remain higher than pre-COVID-19 levels given market structure, store rollout and cost management. In Australia, we expect margins to remain firm given the more concentrated market structure, tight product supply and stringent control on costs the company has maintained over the past two years. The company’s sprawling retail network overseas now accounts for one-quarter of its group earnings and with further rollout in each major country, its share of earnings will rise over the next three years. Offshore stores will rise from 107 today to 121 by FY24e.