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

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.