Super Retail Group’s trading update to the end of April 2023 reveals good sales trends are persisting but margin pressure is starting to show through. Gross margins are falling and operating costs are rising. In our view, sales trends are propped up by inflation which we expect to dissipate in 1H24e. Moreover, operating cost pressure will continue in FY24e, making that the year of earnings normalisation. Super Retail’s upcoming strategy day should send some positive messages about growth opportunities, but capex could be higher and defer any major capital management.

JB Hi-Fi’s 3Q23 trading update revealed only a modest slowdown in sales at JB Hi-Fi Australia, but a more notable slowdown in The Good Guys. JB Hi-Fi February and March comp sales fell 0.9% on our calculations and the Good Guys was down 5.7%. The distinction is largely a function of inflation trends shifting lower in appliances more so than consumer electronics. The downturn for JB Hi-Fi is proving orderly so far, but sales trends will slow further from here.

Premier Investments had a solid rise in 1H23 sales but retail EBIT margins fell by 303bp, largely due to a lower currency rate for product purchases. Peter Alexander had good sales growth despite a very high baseline. The brand has contributed more than two-thirds to the group’s earnings growth over the past three years and is the key share price driver in our view. The company is flagging store openings and offshore expansion for both Peter Alexander and Smiggle. Store openings should contribute quickly, but offshore expansion will be measured in our view.

City Chic’s 1H23 result shows the financial cost of its elevated inventory position. The second-half will also be loss-making based on our forecasts. However, the more fundamental question is the magnitude of its recovery in profit margins and the path to a net cash position. Both seem likely. However, investors will need patience. While still facing a challenging six months, conditions are likely to improve.

Coles reported 1H23 sales up 4% and EBIT up 14%. The result showed good growth on the surface, however, reduced COVID-19 costs and the accounting associated with Express earnings drove growth. While sales growth should remain strong, inflation is peaking and operating cost growth could stay elevated too. Coles’ change of CEO comes at a crucial time where delivery of new distribution centres should drive earnings over the next three years.

Woolworths reported a strong improvement in profit margins in 1H23 driven by its Australian Food segment. COVID-19 costs have unwound and cost efficiency programs are delivering results. We expect further margin gains in 2H23e, albeit at a smaller rate. The challenge for Woolworths is its profit margins will be close to long-term averages by the end of FY23e and EPS growth may step down to single-digits in FY24e and beyond.

Super Retail Group’s strong 1H23 result was accompanied by accelerating sales in its January 2023 trading update. Can the company buck the broader macro trend where signs of slowing sales are emerging? It’s unlikely in our view. Fading inflation and a peak in domestic tourism make it likely there is a sales slowdown by mid-year. Super Retail’s gross margins are likely to drop as sales slow even though it has some cost reductions in sourcing and sea freight.

While JB Hi-Fi had a record half of earnings in 1H23, that is in the rear-vision mirror. The forward trajectory suggests a normalisation of sales and earnings is imminent. We expect negative comp sales in 2H23e and 1H24e for both JB Hi-Fi Australia and The Good Guys. We expect gains from inflation, and The Good Guys improved buying terms.

City Chic’s 2022 AGM trading update highlighted a normalisation in sales and squeeze in profit margins for FY23e. We expect FY23e EBITDA pre AASB-16 to fall to $19 million. While a low point, profitability should recover as the industry-wide inventory position normalises over the next year. We have structurally dropped our sales forecasts given Avenue looks to be resetting sales lower like many online businesses. We expect EBITDA margins to trough at 5.6% this year and recover to 11.8% by FY25e.

Harvey Norman has provided an AGM update that reflects the strength of the consumer in many of its markets. Australian comparable sales rose 8.8% and the three-year CAGR is 8.0%. Slovenia and Ireland are also very strong. Given good sales results, we expect profit margins to only fall slightly in FY23e. If Harvey Norman can reduce its inventory levels in an orderly manner, the margin compression could be less than feared.