Coles reported overall sales growth of 3.4% for 3Q25. The solid result was driven by its online growth, which has mixed fortunes given the lower margins online. Liquor sales remain soft and there will be rebranding costs over the next 12 months dragging on profit margins. Declines in tobacco sales are also an earnings headwind. We lower our EPS slightly by -0.8% in FY25e and -1.1% in FY26e.

We have updated our forecasts for the Australian retail sales outlook. Despite significant global uncertainties created by US tariffs, Australian consumers have taken it in their stride. We forecast retail sales growth for 2025 of 3.4% (prev 3.6%). Our downgrade in growth is only for supermarkets and liquor with softer volumes and price inflation. Non-food retail has started the year strongly, particularly in household goods and online. The strength in retail sales is largely attributable to strong household income growth and the drivers of this elevated growth will be difficult to sustain given the magnitude of recent tax cuts and outsized population growth. A better backdrop would require consumers to save even less. We expect sales growth of 4% beyond 2025.

Australian inflation for the March 2025 quarter was 2.4% continuing a trend of decelerating inflation in the past year. Lower petrol prices and energy bill subsidies are helping. In retail, there was pick up in supermarket inflation, largely for meat and fresh produce. For non-food retail, there was deflation in a range of categories such as electronics, hardware, sporting goods and footwear, which may signal some margin pressure. With some input cost pressures and a lower Australian dollar, retail inflation is more likely to tick up from here. The trimmed mean inflation of 2.9% is instructive for the upcoming wage decision by the Fair Work Commission and may see retail wage rate growth of 3.3% to 3.7% for FY26e in our view.

The upcoming 3Q25e sales results for Coles, Woolworths and Endeavour Group are likely to show Coles in front in both supermarkets and liquor. The shift of Easter timing will distort growth rates. We forecast Coles Supermarket comparable sales at 3.0% and Woolworths at 2.6%. For Coles Liquor, we forecast 2.6% and Endeavour Retail at -0.3%. All figures are Easter-adjusted. We will be interested in any step change in inflation for produce and meat given recent weather disruptions. Overall industry sales growth rates remain lacklustre, particularly relative to cost growth

The agreement with Frasers Group gives Accent Group a 25 year licence to operate Sports Direct in ANZ. Frasers Group will also increase its holding in Accent Group to 19.6% providing $60 million in funding for the initial phase of the rollout. With a 50 store within six years target, Sports Direct provides a new growth path with additional sourcing and product benefits for the group.

The Australian retail sector imports a significant portion of products from offshore, particularly in non-food categories. In most cases, these goods are purchased in a foreign currency, which means currency volatility can impact the cost of goods and retail profits. In Issue 9 of Price Watch, we analyse the impact that changes in the Australian dollar against the US dollar (AUD/USD) can have on retail prices and profitability. A fall in the AUD/USD typically impacts retail prices with a six-month lag.

With 45% of sales in the US, Breville is in the cross-hairs of the disruption from US tariffs. In this report, we assess Breville’s relative competitive position in the US for imported products, estimate the impact tariffs could have on earnings and discuss alternatives the company may pursue. Breville is in a decent position given most imports in small appliances come from China (and other Asia). Breville could see an earnings impact of -19%, or -$38 million on our estimates from the tariffs, with lower volumes, some margin compression partially offset by lower cost of goods, marketing and staff incentives.

At a time when core footwear banners for Accent Group appear to be reaching maturity and competition is impacting margins, Frasers Group is looking to establish a physical presence via Sport Direct. Sports Direct creates the opportunity for further store growth with category expansion. With weakness in the core from a lower forecast store count and weaker gross margin, we lower our current earnings forecasts for Accent Group. We have increased the probability weighting to a Sports Direct entry to 90%.

Bunnings store tour and management presentation provided plenty of initiatives the retailer is pursuing to grow sales and margins, despite its large market share and high return on capital. Bunnings sales per square metre is less than half US peer Home Depot. Bunnings will add product ranges like auto, solar and cleaning to lift sales productivity. The company is positioned for margin expansion when the building sector recovers. For each 1% sales improvement, EBT could rise by 2.3% on our estimates. Bunnings also has margin upside from retail media, which could add $100-200 million in EBT over time.

Australian retail sales rose 3.6% in February 2025 year-on-year adjusted for the leap year in 2024. The growth rate near 4% has been largely consistent for the past 5 months. Most drivers of spending are becoming more favourable – tax cuts, rate cuts and lower cost of living pressures, which influences our view that retail spending will continue near 4% over 2025.