Australian retail is setup for a good Christmas this year. The growth rates leading into Christmas has been far stronger than last year and while supply chains are not seamless, they are functioning better. Our feedback indicates low single digit sales growth for many with some stronger anecdotes. Given the timing of Omicron last year, sales feedback should strengthen further into Christmas and January 2023. We expect strong trading to lead to upside risk in near-term earnings for retailers.

Inghams reported EBITDA of $222 million for 1H22. This was a decent result with flat margins despite headwinds from lockdowns adversely impacting the channel in the half. Unfortunately, COVID-19 disruptions will be more impactful on earnings in 2H22e. We estimate 2H22e EBITDA of $171 million down 26%. The impact from staff absenteeism, an adverse sales mix and oversupplied wholesale market all make for a difficult half. However, the issues should be transitory and if COVID cases continue to fall, earnings should improve from April 2022 onwards. We expect a recovery in FY23e.

The outlook for Coles and Woolworths in 2022 is looking better. The risks around COVID-19 costs are now well managed. We expect upside from consumer stockpiling near-term will lift sales earnings and higher food inflation over the next 12 months will be positive for earnings. In this report we look at how the COVID-19 costs may unwind and the impact that higher food inflation will have on the supermarket sector.

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.

Our feedback from a range of contacts is that Christmas 2021 trading was solid, particularly given the high base from 2020. The strongest feedback comes from the furniture sector. Whitegoods were strong and supermarkets had a late rush in sales. While a good festive season, the debate is going to shift quickly to the impact that COVID-19 has had on January 2022 trading. Sales could be down 10%-20% for the month leading to 3%-5% full year EPS risk in our view.