Premier Investments FY23 result revealed a slowdown in sales and gross margin pressure in the second-half. The company found sufficient flexibility in its cost base to soften the 2H23 EBIT decline to only 4%. For FY24e, we expect weaker sales, lower gross margins and more cost inflation.
City Chic had an incredibly challenging FY23. Sales declined and gross margins were crushed. The company made an EBITDA loss (pre AASB-16) of -$35 million for the continuing business. However, there is light at the end of the tunnel. The sales decline should abate by the end of 1H24e. The company has a net cash position and a clear path to profit margin recovery over the next three years.
Woolworths reported FY23 sales up 6% and EBIT up 16% and the result was characterised by a return to more normal trading patterns. EBIT was up 3% excluding the impact of an unwind of COVID-19 costs in the prior year. The Woolworths Food division had a strong improvement in margins, which bodes well for FY24e and its investments in adjacencies is supporting higher margins than major peer Coles. We expect elevated capex to continue over the next two years given supply chain investments, which should deliver a return.
Australian supermarket sales are at a record low as a share of total food spending. Dining out is winning share of spend and the same is true for the US and NZ. Our research shows that employment growth, inbound tourism and savings tend to be well correlated with dining out spending and all still point to solid growth. Supermarket prices have also risen faster impacting its relative affordability. Dining out is bound to slow, more so in 2024 than now and unfortunately for supermarkets any uptick in volume may be more than offset by a fade in inflation.
Super Retail Group reported FY23 EBIT growth of 10%. For the second-half EBIT dropped by 4%. Sales trends have held up well so far and the company has reduced its inventory. However, conditions are likely to be more challenging over the next year. As a result, profit margins will fall. The company will also have rising overheads and costs associated with its loyalty program in FY24e.
Treasury Wines reported FY23 EBITS up 11%. The second-half rose by 6%. While the profit result was decent, the sales performance was poor, particularly in the Americas. Margin targets have largely been met and the company needs to kick start revenue growth from here. We expect revenue to rebound in 2H24e. The lower Australian dollar will represent a meaningful contribution to the achievement of “high single-digit” EBITS growth in FY24e. The key share price driver remains an unwind of tariffs in China, which may happen within the next six months.
Endeavour Group reported FY23 sales up 2% and EBIT up 11%. The debate is whether the company can cut costs sufficiently to ensure profit margins do not fall in FY24e. The company faces cost growth of 7% on our estimates and sales growth is more likely to be 4%. While a combination of gross margin gains in its Retail division and some cost savings should help, we expect modest margin compression. Another headwind in FY24e will be higher net interest costs.
Bapcor reported strong FY23 revenue growth of 10% with EBITDA rising 3% for the full year. In the second-half sales grew 8% with EBITDA down 2%. Risks to Bapcor are focused on the impact of higher wages, plus increasing rent and overheads. The cost out program announced in November 2022 will help to mitigate these cost pressures. Bapcor enters FY24e with an improved inventory position after reporting a strong cash realisation in FY23. The sales growth trajectory is likely to soften from here as same store sales start to normalise.
JB Hi-Fi may have reported a solid FY23 result, but the second-half provides an indication of the challenges ahead. Its 2H23 sales fell 0.5% and EBIT was down 23%. We expect sales to drop 3.0% in FY24e with EBIT down 26%. The risk to gross margins is the key unknown from here in our view. Even though JB Hi-Fi’s inventory is clean, there is elevated inventory with some suppliers and retailers. We expect EBIT margins to revert to FY19 levels by FY25e. The prospects for capital management look slim given higher working capital and capex.
City Chic’s sales run-rate stepped down materially in 2H23e with sales for the half likely to be $128-$132 million, down 29% on the pcp. Elevated discounting is the primary driver. The quality of inventory does also worry us. The company’s guidance that gross margins are down 18 percentage points, suggests that almost two-thirds of its sales drop is a function of lower realised prices. We expect weak sales to continue in 1H24e as discounting continues. Sales should recover in 2H24e onwards. However, the sales base is likely to settle around $316 million in FY25e, far below aspirations of $400 million only six months ago