It’s shaping up to be a great Christmas for Australian retailers, but the share market remains cautious. Sales feedback is positive. Margins are likely to surprise on the upside. We are hearing strong feedback in appliances, apparel and footwear. Given November-December can be more than one-third of annual earnings, there is upside to consensus expectations for FY22e in our view. While sales look good, investors are nervous about buying into a peak in retail earnings.

Coles (28 October 2021) and Woolworths (27 October 2021) will release 1Q22e sales next week. We forecast Coles to deliver 0.9% comparable sales growth in Supermarkets, with Woolworths at 3.3%. The gap will have opened in Woolworths favour given lockdowns favoured online sales and Coles had availability challenges given disruptions from COVID-19 in its DCs. We expect these issues are likely to unwind and the growth gap will narrow considerably beyond 1Q22e.