Preview: Aussie supermarkets set to capitalise on high inflation, but softer demand ahead

JB Hi-Fi

19/02/2023 22:51

By Harshita Swaminathan
       Feb 20 (Reuters) - 
    Australian supermarkets will reap bigger profits in fiscal
2023 half-year due to decades-high inflation and increased
savings, but analysts warned of a rough second-half as
households reel from mounting expenses due to higher cost of
living.
  
    Top supermarket chains Woolworths Group  WOW.AX  and Coles
Group  COL.AX  will likely see growth in their half-year profit,
according to analyst estimates, helped by higher shelf prices
and lower COVID-19 related costs.
    Australian households face higher grocery and energy bills
due to global inflationary pressures, while budgets are further
squeezed by higher mortgage payments because of the central
bank's rate hikes aiming to quell inflation. 
    The hikes have added A$900 a month in repayments to the
average A$500,000 mortgage, according to an estimate. 
    "There's a bit of a disconnect between confidence and
reality at the moment - the confidence levels are low, but
people are still spending. So I think outlook statements will be
cautious" said Matthew Haupt, a lead portfolio manager whose WAM
Leaders fund has holdings in Woolworths and Coles. 
    Haupt said high household savings after the government
handed out stimulus checks during the pandemic has kept
Australians spending despite higher prices, but once rates peak
and mortgage payments top out, retailer top-lines may shrink. 
    Woolworths said food prices over the September quarter rose
7.3%, while Coles reported a 7.1% rise. Australia reported
headline inflation of 7.8% in the December quarter, a 33-year
high.
    A return to in-store shopping is also expected to improve
margins, according to analysts at Macquarie, as in-store margins
are usually better than online. Analysts at Citi also expect
benefits from selling prices rising faster than cost bases.
    As spending power reduces over the second-half, electronics
retailers were seen feeling the pinch disproportionately, as
later confirmed by JB Hi-Fi  JBH.AX  reporting slower sales
growth and flagging an "uncertain period" ahead.
    "We are concerned that the rising cost of living, fixed rate
mortgage roll-offs and normalising service consumption erode
consumer discretionary spending in the second half of calendar
2023," analysts at Macquarie said. 
    Retail conglomerate Wesfarmers'  WES.AX  main earner,
Bunnings, reported only a slight pickup in profit and Wesfarmers
relied on a recovery in Kmart, which was under lockdown in the
previous period, for profit growth.
    Coles and Woolworths are expected to report half-yearly
earnings on February 21 and 22, respectively.
    Brokerage estimates:
  1H23 estimates      Woolworths          Coles
    Macquarie       A$842 million     A$568 million
  Goldman Sachs     A$893 million     A$542 million
       UBS          A$871 million    A$555.2 million
    Jefferies       A$881 million     A$584 million
                                             
     Average       A$871.75 million  A$562.3 million
  1H22 reported     A$676 million     A$549 million
 (Reporting by Harshita Swaminathan in Bengaluru; editing by
Diane Craft)
 ((Harshita.Swaminathan@thomsonreuters.com;))