Super Retail Group reported FY22 sales up 1% and EBIT fell by 18% (52-week basis). While a fall, earnings are still well above pre COVID-19 levels and sales trends have started FY23e strongly. We expect a good 1H23e but weaker 2H23e as broader retail spending trends slow. Gross margins are likely to fall a little further and negative operating leverage could be evident in FY24e.
Australian retail sales rose 10.3% in May 2022. While it is a slowdown from April’s growth rate of 11.1%, the moderation in growth is mild, particularly given the pressures on consumers from higher interest rates and petrol prices. The Easter boost to supermarkets, liquor and apparel has faded, but all categories did well in May other than takeaway food which was up only 2.5%. In our view, April 2022 was the peak of retail sales and growth will slow each month going forward. Negative headlines may hit sales briefly, but the more fundamental slowdown associated with lower household incomes is more a risk to 2023 sales growth.
City Chic provided a trading update about sales and EBITDA for 2H22e. Sales growth is 25% so far in 2H22e, which is 4% below our estimate. The lower than forecast sales were more pronounced in the Americas business. We expect a small pick-up in sales growth for the remainder of the half with 28% growth forecast for 2H22e. The company expects 2H22e EBITDA to be slightly ahead of 1H22. We forecast 2H22e EBITDA of $23.7 million, compared with $23.5 million in 1H22.
Wesfarmers trading update provides a reminder about the challenges facing the retail-centric company. Kmart’s earnings fell 56% in 1H22e on a sales decline of 10%. The fall in earnings suggests higher costs, some of which will persist as global supply chains become more expensive and online grows as a share of sales. While Kmart had a tough half, Bunnings earnings may have only fallen slightly and WesCEF was up.
We expect Super Retail Group will have a good Christmas trading period and gross margins hold up relative to strong levels from 2020. However, the company does face rising import costs and higher operating cost growth that is likely to lower EBIT margins in calendar 2022.
As key states of Australia emerge from lockdowns, we expect sales trends to improve for JB Hi-Fi. The demand for key categories like TVs, whitegoods and small appliances is likely to be strong. More importantly, with some tightness of supply, we expect gross margins across the electronics industry to remain firm in the medium term, particularly for The Good Guys. JB Hi-Fi has the added flexibility of a net cash position.
We initiate coverage on JB Hi-Fi. In our research report, we assess the sustainable earnings base. JB Hi-Fi has won market share, which has supported operating leverage. The majority of the gross margin gains in The Good Guys are likely to stick given both an improved sales mix and better bargaining with suppliers. The company also has a net cash position providing it with opportunities for growth or capital management.