We have upgraded our retail sales outlook for FY23e given such a strong start to the fiscal year and the benefit that wages growth and inflation will have on sales over the next six months. We forecast retail sales growth of 6.0% (prev 3.4%) for FY23e and 0.8% for FY24e (prev 2.4%). The weakest period of sales growth is likely to be the December 2023 half in our view, making the downturn still some time away. We are watching retail inflation closely.

Australian supermarket industry sales only rose 3% in July 2022. The slowdown is not a reflection of customers retaliating to higher prices, its merely the normalisation from lockdowns last year. In this report, we analyse the likely normalisation path in sales. Coles is likely to grow faster than Woolworths in the September quarter. However, the real winner is Metcash which is holding onto the vast majority of its customer gains. Since 2018, the fundamental shift from the majors to reduce promotions and open fewer stores has provided a better operating environment for Metcash.

Australian retail sales rose 12.2% year on year in June 2022. The three year compound annual growth rate for June was 7.8%, significantly above long term trends around 5%. Drilling down into categories, the strongest were cafes & restaurants and fashion. The only spot of weakness was fresh food specialists. In our view, retail sales will remain strong through the next four months lapping lockdowns from a year ago, with the first signs of weakness possible in November 2022. Retail sales are likely to be weak in 2023 given lower household income growth.

It’s shaping up to be a great Christmas for Australian retailers, but the share market remains cautious. Sales feedback is positive. Margins are likely to surprise on the upside. We are hearing strong feedback in appliances, apparel and footwear. Given November-December can be more than one-third of annual earnings, there is upside to consensus expectations for FY22e in our view. While sales look good, investors are nervous about buying into a peak in retail earnings.

Coles (28 October 2021) and Woolworths (27 October 2021) will release 1Q22e sales next week. We forecast Coles to deliver 0.9% comparable sales growth in Supermarkets, with Woolworths at 3.3%. The gap will have opened in Woolworths favour given lockdowns favoured online sales and Coles had availability challenges given disruptions from COVID-19 in its DCs. We expect these issues are likely to unwind and the growth gap will narrow considerably beyond 1Q22e.