Australian retail sales rose 4.1% in November 2024. In non-food retail, sales were up 4.0%, while the CAGR growth over five years was 7.3%. November benefited from a bigger Black Friday event but also from warmer, drier weather. Supermarkets, liquor, fashion and cafes/restaurants all had much stronger growth. The sales trends have improved in recent months, which may be a little stronger than true trends because of favourable weather and the heavier discounts enticing shoppers. We expect some softness in the March 2025 quarter.

Australian retailers have had a good Christmas. Even with a bigger Black Friday, consumers were in the mood to spend at Christmas and a late surge in sales is likely to lead to good growth. Sales trends are likely to be at least 1% better than the September quarter. In addition to good sales, few retailers are complaining about margins. While sales growth has been good, margins are already high and cost growth is elevated.

Woolworths is having a challenging time in its core supermarket business. The recent distribution centre strike will impact sales and earnings in 2Q25e, but should dissipate. More fundamentally, the company’s price investment is unlikely to deliver a decent return and online sales are margin dilutive. Across the industry, the drop in supermarket inflation gives us cause for concern about the industry’s sales and margin outlook over the next two years. While a short-term winner from the strikes, broader industry sales weakness will make it hard for Coles to deliver decent sales growth in 2025.

The outlook for retailers this festive season is constructive. Perhaps it is best characterised as a sign of the times where consumers are acting cautiously but do have money to spend. Therefore discounts are working. Black Friday event sales were likely up 4%-7% for many retailers based on our feedback. We expect the strongest growth was online. Amazon took share. Home appliances, fashion and beauty have done best. However, there are more discounts.

Australian retail sales rose 3.8% year-on-year in October 2024. It was a strong month for non-food retail up 5.1%, which is above long-term trends. It is uncommon for non-food to outperform, but the combination of good household income growth and a softer September has brought out shoppers. Pharmacy, cosmetics, recreational goods and online were the strongest growing categories. Our feedback on Black Friday sales suggests November will show solid growth too. We may see some weakness in December as promotional fatigue sets in.

Lovisa’s AGM trading update revealed weakening sales trends and a slower pace of net new store openings. We expect to see a year of slower store openings, influenced by the CEO transition period being so drawn out. Increasing competition and promotional activity weighs on margins.

Accent Group will provide a trading update at its November AGM. Like-for-like sales growth for the first seven weeks of FY25e was 3.5%. We expect trends to have slowed slightly and forecast 1H25e like-for-like sales of 2.8%. We have included the recently announced distribution agreements to our forecasts.  We also consider peer commentary on gross margin and competitive behaviour.

The festive season is the key profit driver for almost all Australian retailers. Its shape has shifted meaningfully over the past decade as Australian shoppers have embraced Black Friday promotions. We expect an even bigger November sales period in 2024 as more retailers and consumers position for Black Friday deals. While November gets bigger, it has largely been at the expense of December sales. The timing of promotional events is also shifting a little and we may see promotions earlier in November this year. The primary risk for retailers is longer, deeper discounting impacting gross profit margins. 

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.

Woolworths reported better 1Q25 sales trends compared with recent quarters. However, the company has increased its price investment to achieve the better sales result. This price investment is likely to continue and will weigh on profit margins in FY25e with a gradual recovery requiring a cost focus beyond that year in our view. There is a risk that the discounting incites a response. Big W and NZ have had better sales growth in 1Q25 as well, but margin recovery will be years away.