Super Retail Group’s trading update shows largely consistent sales trends over the past 10 weeks, with LFL sales up 3.4%. Supercheap Auto remains the standout segment. Gross margins are steady and the company is more optimistic about store openings. Super Retail’s PE ratio has derated on concerns about its inventory position. We think those concerns are misplaced given the challenges in securing inventory that will continue throughout 2022.

Coles had stronger 3Q22 sales growth largely driven by higher food inflation. While market views vary, it is clear that inflation is adding to revenue growth with more to come over the remainder of 2022. Even with better sales growth, Coles is losing share, driven by fewer store openings. The company may be rational in shutting stores, but the rest of the market is not following. Coles Liquor comparable sales growth was a highlight, comfortably outstripping Endeavour. However, the business has a long way to go to lift sales productivity to a level anywhere near Endeavour.

City Chic provided a trading update about sales and EBITDA for 2H22e. Sales growth is 25% so far in 2H22e, which is 4% below our estimate. The lower than forecast sales were more pronounced in the Americas business. We expect a small pick-up in sales growth for the remainder of the half with 28% growth forecast for 2H22e. The company expects 2H22e EBITDA to be slightly ahead of 1H22. We forecast 2H22e EBITDA of $23.7 million, compared with $23.5 million in 1H22.

Australian inflation has accelerated significantly with retail inflation accelerating by 120bp over the past three months. The most notable step-up in prices is in supermarkets, electronics and sporting goods. The categories that are lagging are liquor, clothing and footwear. We expect inflation to rise further in calendar 2022 given the input cost pressures that are working their way through the value-chain. The question is whether inflation is within a sweet spot, providing a boost to revenue greater than the volume decline. At current levels, we think inflation is a net positive as the rate of inflation is only slightly ahead of wage growth.

Australian inflation has accelerated significantly with retail inflation accelerating by 120bp over the past three months. The most notable step-up in prices is in supermarkets, electronics and sporting goods. The categories that are lagging are liquor, clothing and footwear. We expect inflation to rise further in calendar 2022 given the input cost pressures that are working their way through the value-chain. The question is whether inflation is within a sweet spot, providing a boost to revenue greater than the volume decline. At current levels, we think inflation is a net positive as the rate of inflation is only slightly ahead of wage growth.

Endeavour Group reported 3Q22 Easter-adjusted sales decline of 0.7% in its Retail liquor business and 2.5% growth in Hotels. The sales trends improved later in the quarter as the economy reopened further after a spike in Omicron cases in January 2022. The company also noted some disruptions and costs associated with floods in northern NSW and QLD.

Amazon has made some noteworthy decisions in Australia. It now has a massive 200,000 sqm distribution centre (DC) operating in Western Sydney and has held back on raising the price of Prime, unlike the US. Is this a sign of more aggressive customer acquisition in Australia? Why is Prime so much cheaper here than in the US? In our view, Amazon is simply in its infancy. It will need to expand its same day delivery service before lifting the price of Prime. In order to offer same day delivery, Amazon probably needs 3-4x the DC capacity that it has today.

We have refreshed our forecasts for the retail sales outlook. In short, sales growth has started 2022 stronger than we anticipated and good conditions should last another six months. We forecast 4.5% sales growth in calendar 2022 (prev 3.0%) and 2.3% in 2023 (prev 3.0%). The overall two-year growth is virtually unchanged. While higher interest rates will impact spending, wages growth will be higher and the savings rate will cushion the impact. Higher inflation should also help retail sales.

Australian households and companies have not dealt with an interest rate increase for more than 10 years. However, higher rates are imminent. In Issue 3 of The Retail Mosaic, we assess the impact that higher rates may have on spending, company earnings and share prices. It takes, on average, 18 months for a rate hike to impact spending, but for furniture it can be in as little as six months. We expect housing churn will slow as rates rise, placing further downside risk on household goods. Retailers have limited debt and some hedging that will moderate the earnings risk from higher rates. However, PE ratios could derate by 10-20%, particularly for high PE defensive stocks such as supermarkets and conglomerates.

Australia’s 2022 wine grape harvest has been picked. The effects of China tariffs on the Australian wine sector are likely to show through as a sharp fall in grape prices this year. We see a drop of at least 15% for red wine grapes. While difficult for growers, we expect an earnings benefit for Treasury Wines over the next three years. We estimate a cost saving from lower grape prices of $75-85 million, or 12% of EBITS by FY25e. There are a number of drivers for Treasury’s earnings including a recovery of higher margin channels, supply chain savings and lower grape prices. We forecast three-year EBITS CAGR of 10% to FY24e.