Last week, Dollarama, a Canadian retailer, surprised the market by making a takeover offer, at a 112% premium, for The Reject Shop. While the acquisition price looks ‘full’, it is a cheap entry to access good floor space in shopping centres. The lack of new space, increasing competition for quality sites, a lower Australian dollar and a relatively strong Australian consumer could all contribute to further foreign acquisitions of Australian retail. A changing landscape could impact the margins enjoyed by incumbents across most retail segments.

Myer reported flat sales, but EBIT down 15% in 1H25. Sales were impacted by issues at the new National Distribution Centre (NDC) which shifted the sales mix to lower gross margin concession product. The trading update showed a flat start to the second-half. Earning will be largely driven by synergies and cost out initiatives over the next 2-3 years.

Woolworths has said that each of its businesses must “stand on its own two feet”. For Big W, perhaps it could be cut off at the knees at some point. While an exit is hard to execute, in some form, we expect it may occur over the next 18 months. For the retail industry it will be highly disruptive given the floor space needs to generate more sales and gross profit. A mix of other retailers could generate as much as $2.3 billion, or 50%, more in sales than the prevailing level.  While in the short-run, it may benefit a retailer like Kmart, the medium-term risk is all major retailers with geographic overlap lose some sales, namely Coles, Woolworths, Kmart and Target.

We have initiated coverage of Myer (MYR), a domestically focused department store retailer with an industry leading loyalty program, a $700 million online business and a national store footprint of over 50 stores. Myer department stores have a value proposition in the in the mid to high value range. While the merger of Myer and Premier Apparel Brands builds scale, the combined business has weak sales trends and thin margins. Earnings growth in the next three years is driven by the delivery of synergies. The combined group will then grow modestly unless we see the exit of one or more competitors. Any misstep in achieving the synergies will not be well received in our view. 

We have initiated coverage of Guzman y Gomez (GyG), a fast-food retailer offering Mexican-style cuisine that has exhibited strong like-for-like growth in recent years with a targeted store rollout in the Australian market.  Accelerating store openings combined with margin expansion are the key elements to this growth story. GyG’s Australian store productivity is industry leading and the scope to add more drive-thru stores is substantial. Moreover, fixed cost leverage and higher franchise royalty rates will support a doubling of EBITDA margins over the next four years. 

Coles’ investor day last week kept the messages high level and consistent about its strategy with an emphasis on value, digital evolution and efficient execution. The focus was its online and distribution centre automated fulfillment. While Witron is clearly proven, for the Ocado CFCs, we expect the payback will be very long-dated. Coles recent capex projects will lift profit margins over the next two years. 

Sigma Healthcare reported underlying EBIT growth of 20% in 1H25, while Chemist Warehouse reported standalone 2H24 EBIT growth of 37%. Chemist Warehouse EBIT for the comparable trading period is 14x larger than Sigma. This cements our view that the merger is the key driver of Sigma’s share price.

Nick Scali is a furniture retailer that has exhibited consistent growth over the long term. We see the store network growing to 153 over the next four years to FY27e, a compound annual growth rate of 9%. New stores will come in both existing markets and the newly entered UK market. The opportunistic, low-cost entry into the UK sets a base from which to expand the Nick Scali brand into the UK.

Wesfarmers held its annual strategy day and, as always, delivered a consistent message about its focus on long-term shareholder value creation.  The tone of Wesfarmers annual strategy presentation focused more on growth initiatives and highlighted the progress on productivity and technology investments. While a positive presentation, the detail is unlikely to change consensus earnings expectations and the share price remains very stretched.