Wesfarmers’ AGM update revealed a slowdown in sales in Bunnings and more cautious commentary on the retail backdrop. In the scheme of things, the slowdown should be mild and therefore the debate is more about the appropriate PE ratio than it is about earnings risks. For Bunnings, we expect sales growth to slow more so in 2H27e and 1H28e as the lagged effects of lower housing churn and lower house prices show through. Kmart has soft sales growth but currency gains to offset the pressure on earnings from cost growth and DC transition.

JB Hi-Fi provided a January 2022 trading update with improving sales trends in 2Q22. NPAT of $288 million was down 9% on 1H21, but up 69% on 1H20. While many are wary an anticipated mean reversion in sales and earnings, it may be gradual. While volumes will mean revert, price inflation is likely to accelerate, gross margins are likely to be higher in The Good Guys and there will be operating leverage.