Super Retail Group reported 1H22 sales down 4% and EBIT down 33%. The process of normalisation in earnings has begun. We expect 2H22e sales to rise 1.3% and EBIT to fall 11%. The company’s elevated inventory position is largely skewed towards Supercheap Auto, which in inherently lower risk than its other segments. Operating cost growth will continue in 2H22e given data and digital investments, but there is some flex to manage labour costs to sales.

We initiate coverage of Super Retail Group. The company may have a challenging six months over the remainder of 2021 given lockdowns and a very high base from 2020. Fundamentally, the company has lifted its online penetration, increased its loyalty cardholder base and reduced discounting. These changes all support higher EBIT margins medium term. Moreover, the balance sheet is net cash.