We have updated our retail sales outlook, with modestly higher forecasts for 2024. We forecast 2.7% growth (up from 2.5% previously). We have lifted our non-food forecasts, but lowered food & liquor forecasts. The prevailing sales trends are very soft but should improve in the back-half of calendar 2024 as income tax cuts flow through. We only see a modest pick up because lower retail price inflation will constrain overall sales growth in FY25e.

We initiate coverage on Breville group, a global kitchen appliance developer that has achieved very strong sales growth in recent years, particularly in the coffee category. After a soft FY24e, we expect solid sales growth to resume in FY25e and beyond with household penetration, new markets and new products all supporting sales growth of 6%-9%. While gross margins should also expand, the company will need to invest in advertising and product development to sustain momentum.

Australian retail sales rose by 1.6% year on year in February 2024, adjusted for the leap-year effect. Sales trends are very weak, given population and price are still positive contributors to retail. As a silver lining, retail is now almost back to pre COVID-19 underlying sales trends. Perhaps the mean-reversion is done? The weakest categories in February were furniture, electronics and footwear. Pharmacy, cosmetics and apparel did well. We expect retail sales growth to continue to hover around 0%-2% over the next few months.

The removal of Chinese tariffs on Australian wine exports is positive for Treasury Wines. However, the company’s emphasis of a “modest” impact initially reinforces to us that the tariffs were a catalyst to diversify Treasury’s market exposure. As a result, China will be an incremental market, which means incremental costs (we estimate $30 million in next 12 months) as well as a three-year wait for meaningful incremental China earnings. Sales into China will be smaller in quantity, but higher priced than historically.

Premier Investments reported 1H24 Retail EBIT down 4.8% to $210 million. Gross margins were higher than expected and along with tight cost control, helped to offset the operational leverage of declining sales. We expect a similar outcome in 2H24e with sales only up 1% and elevated cost growth leading to lower EBIT. Little detail was provided on the strategic review with a potential split up of the business possible in 2025.

Income tax cuts that come into effect from 1 July 2024 are worth $20 billion over the next fiscal year. While a big number on the surface, we feel the figure needs context given other factors such as changes in employment, living costs and savings could offset some of the benefit. Isolating the tax cuts, we estimate about $5 billion could make its way into retail. All else equal, this is a 1.1% boost to retail sales growth for FY25e. However, a 2.5% drop in hours worked, 1.4% rise in either the unemployment, living costs or the savings rate are equivalent to $20 billion and could neutralise the benefit to retail from tax cuts.

Australia’s population growth tends to be higher than other developed countries, supported by higher net migration. In Issue 8 of The Retail Mosaic, we analyse the impact net migration has on retail spending, which categories tend to benefit most and which retailers are best located for migration growth. We find that migrants tend to spend more on food and fashion. Retailers that are best located include Super Retail Group’s Macpac and Rebel Sport. JB Hi-Fi and Bunnings also have store locations that provide a greater contribution from population growth.

Metcash’s investor day made it clear that it is looking to accelerate growth. This growth will increasingly come from store openings and Metcash will need to spend more capex to facilitate the growth. The company is in a stronger position to grow given the profitability across the network and capability of management.

Australia’s national accounts highlights an improvement in income growth as the headwinds from higher interest rates and taxes eases back. For the December 2023 quarter, household income rose 4.3% and spending was also up 4.3%. We are seeing a gradual drop in the share retail has of total spending and has further to go in our view given outsized spending over the past four years.

Australian retail sales rose 1.2% for January 2024. Half of retail categories were in decline, including notable declines in furniture, electronics, footwear and recreational goods over the month. Trading updates from a number retailers highlight stabilisation in sales trends, but at a weak level of growth. We expect subdued sales trends to persist over the next four months.