We have produced a chart pack of retailer performance vs market. This market share report provides two insights – 1) Performance of key ASX-listed retailers compared with market growth. 2) Market structure and individual retailer performance over time. The most interesting perspective about the data in the near-term is the recent sales performance for supermarkets, hardware, liquor, and electronics. The data includes actual six-monthly growth in industry sales to end of December 2023.
Costa Group has received an indicative acquisition proposal at $3.54 per share including potential dividends. Due diligence by Paine Schwartz, the potential acquirer, will conclude on 1 August. We see a 90% probability of a takeover proceeding. The indicative offer is 35% higher than where the shares were trading just prior to a news article speculating on a potential takeover and the multiple is well ahead of its average over the past three years. There is an argument that the margins are depressed, and past capital investment and acquisitions are yet to bear fruit (pun intended), but the company has inherent earnings volatility and there is an oversupply in blueberries and avocados keeping a lid on margins.
Harvey Norman provided an earnings guidance range for FY23e with the mid-point at $670 million profit before tax (pre revaluations and AASB-16). The guidance suggests 2H23e earnings have halved, which doesn’t bode well for FY24e. Harvey Norman’s earnings drop is likely to be more severe than rivals given its elevated inventory and franchising model. The company has also lost market share. We expect a trough in margins in FY24e with a partial recovery in FY25e.
Harvey Norman’s share price is trading below book value of $3.55 per share. In this report, we analyse its property value and Franchise margins. The company has over $3.7 billion in property and an enterprise value of $4.7 billion. The last reported cap rate on its investment property was 5.4% in FY22. By FY24e, we see the cap rate rising to 7.5%. We expect its property value to drop by more than $800 million and Franchise margins to fall below 2019 levels.
Endeavour Group reported a modest lift in 3Q23 sales with improved sales in Retail still lagging the rate of inflation and the Hotel segment sales recovery driven by lower margin food and beverage sales. Endeavour should report earnings growth in FY23e, but growth may step down in FY24e as soft sales trends, weaker gaming sales and higher wage costs places pressure on profit margins.
Harvey Norman reported a 2% increase in system sales but a 7% drop in group EBITDA for 1H23. The result showed margin pressure from increased discounting across its businesses. The deterioration in its recent sales trends suggests it will be a tougher 2H23e and FY24e in our view. An added risk for Harvey Norman is the higher than usual franchisee inventory holdings, which could squeeze margins further over the next 12 months. We expect margins to largely normalise to pre COVID-19 levels as sales slow and discounting levels increase.
Coles Group reported 1Q23 sales growth of 1.3%. This is a low rate of growth, but an aberration compared with likely growth over the remainder of FY23e. The first quarter was lapping lockdowns. We expect Coles Supermarket comp sales growth to recover to 5.9% in 2Q23e and Liquor should recover to be almost flat. All of the sales growth over coming quarters will be price inflation with some modest volume declines.
Australian supermarket industry sales only rose 3% in July 2022. The slowdown is not a reflection of customers retaliating to higher prices, its merely the normalisation from lockdowns last year. In this report, we analyse the likely normalisation path in sales. Coles is likely to grow faster than Woolworths in the September quarter. However, the real winner is Metcash which is holding onto the vast majority of its customer gains. Since 2018, the fundamental shift from the majors to reduce promotions and open fewer stores has provided a better operating environment for Metcash.
Australian retail sales growth of 8.2% for March 2022 year on year may be as good as it gets. The three-year cumulative growth is as strong as the dizzy heights seen back in November 2021, which proves once again, when COVID-19 cases drop, consumers clearly want to spend. The reality is that higher inflation and interest rates will take the edge off retail spending. However, the moderation in growth is likely to be gradual over the next 18 months as retail sales also benefits from some inflation.
Coles had stronger 3Q22 sales growth largely driven by higher food inflation. While market views vary, it is clear that inflation is adding to revenue growth with more to come over the remainder of 2022. Even with better sales growth, Coles is losing share, driven by fewer store openings. The company may be rational in shutting stores, but the rest of the market is not following. Coles Liquor comparable sales growth was a highlight, comfortably outstripping Endeavour. However, the business has a long way to go to lift sales productivity to a level anywhere near Endeavour.
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