In the chart pack we discuss our view of the retail downturn, noting that it will be gradual because income growth is strong. We also analysed past retail cycles to provide a guide to the potential duration and magnitude of this downturn. We found that on average, past non-food retail cycles have unfolded over 18 months from peak to trough, and another 11 months to return to mid-cycle growth. The key risks to our retail forecasts are housing and price inflation. A greater than 10% fall in house prices would create a negative wealth effect for retail in 2027. On the other hand, price inflation likely to rise in food retail in 2027 masking some of the weakness in retail volumes.

In this report we focus on the risk from growing marketplaces competition. We conclude that marketplaces have extended competitor range but the offer skews to the value-end. Temple’s exclusive and private label product strategy with products proportionately skewed to the mid-market pricing, is a key defence in our view. Growing exclusivity and private label supports growth, reduces pricing and product risk from marketplaces, supports margin improvement and improves customer experience. Temples strategy supports structural growth opportunities.

GyG has reported resilient sales trends despite broader economic headwinds. In 1Q27 comp sales grew 7.1%, an acceleration on 4Q26. The baseline matters in interpreting the strength, but GyG is ideally positioned with growth in online, breakfast and late night occasions and its price rises remain below industry-average. We expect comp sales to remain above 5% over the next two years. EBITDA margins will improve too.

GyG reported FY26 network sales growth of 18% and underlying EBITDA of $85 million, up 29% on the pcp. We forecast comp sales growth to settle at 5.6% in FY27e, after delivering “high single digit” growth in its trading update. Strong sales growth will be needed to improve corporate restaurant margins, which is the primary driver of group margin expansion in FY27e. The prospects for ongoing double-digit store and EPS growth is strong and GyG is a cleaner investment proposition without its US earnings drag.

Nick Scali delivered FY26 EBIT of $125 million, up 18%. Sales growth underwhelmed with a weak second half. Gross margin improved in FY26 to 65.6% up 207bp. The flat trading update for written sales orders signalled an improvement in momentum but it might be temporary. We have lowered our sales forecasts on our expectations of a tougher environment but lifted our gross margin expectations. We need to see more evidence of improving sales before getting positive on the sales recovery.

GyG reported network sales up 18% and EBITDA 30% higher for 1H26. While comparable sales momentum has slowed, EBITDA margin improvement was strong, helped by modest overhead cost growth. GyG’s comparable sales growth is more likely to settle near 4%-5% going forward. Operating leverage in 1H26e is likely to soften in 2H26e as overhead cost growth follows store growth more closely.  We expect US losses of $11-$16 million to persist for at least the next three years, which may frustrate some investors.

GyG reported FY25 network sales growth of 23% and EBITDA at $65.1 million, up 46%. The company reported a step-down in comparable sales growth to 3.7% in the first seven weeks of 1Q26 vs 8.6% in 4Q25. The debate will be whether this lower growth persists and tempers expectations for margin expansion. While operating leverage may soften, the store rollout is skewed toward higher earning drive-thru sites and favourable moves in input costs will offset lower sales expectations in FY26e. The rebasing of comparable sales growth may be scrutinised, but even 4%-5% comp growth is still market leading.

City Chic’s trading update for 1H25e shows an improvement in sales compared with six months ago, but ongoing challenges in the US and operating losses. We expect better profit margins in 2H25e given cost savings and more full-priced sales. However, we are more cautious on the sales outlook. Fundamentally, City Chic has stabilised its business, but the prospect for decent profit margins is still some way off. 

The link provides a presentation associated with a webinar we held. The webinar addressed our updated outlook for retail sales and the drivers of a recovery in retail spending. In the presentation, we answer the question of whether consumers will spend or save their income growth, quantifying the impact of rate cuts and tax cuts, which retail categories we expect to outperform in FY25e, and a comparison of Australia with offshore markets.

City Chic reported an FY24 pre-AASB 16 EBITDA loss of $19 million, an $8 million smaller loss than in FY23. This was a beat to the guidance of -$22 million provided at the time of the capital raising in June 2024. City Chic’s trading update showed positive comparable sales up 9.9% and further, provided revenue guidance of $142 to $160 million for FY25e.