Long winter for retailers starting to thaw
We’ve seen consumer sentiment recover from the extreme lows of the last few years; conditions are ripe for a retail rebound.
Mentioned: The a2 Milk Co Ltd (A2M), Audinate Group Ltd (AD8), BWP Trust (BWP), Domino's Pizza Enterprises Ltd (DMP), Downer EDI Ltd (DOW), Helia Group Ltd (HLI), Monadelphous Group Ltd (MND), Nextdc Ltd (NXT), oOh media Ltd (OML), Reece Ltd (REH), SGH Ltd (SGH), Southern Cross Media Group Ltd (SXL), Ventia Services Group Ltd (VNT), Worley Ltd (WOR), Xero Ltd (XRO)
It’s been a long winter for Australia’s retailers. Since 2022, interest rate hikes, surging inflation, and the more silent thief, bracket creep, have conspired to erode real household disposable incomes. As consumers fought to maintain their standard of living against rising costs, they first dipped into savings and then spent higher and higher shares of income. But this couldn’t continue forever. By late 2023, households were saving less than 2% of disposable income, the lowest rate since the GFC, and COVID-era cash buffers were depleting fast.
Household consumption started to crack under the strain. In inflation-adjusted terms, total retail spending has gone nowhere since late 2022 [Exhibit 1]. This created a nasty confluence for retailers: volumes weren’t growing, but wages were rising at an above-trend pace. As competition intensified, shelf prices started to ease, and margins slumped.
Exhibit 1: An unprecedented stagnation in retail volumes
Monthly retail sales, chained volumes (AUD billion):
Source: Australian Bureau of Statistics, Morningstar.
However, these income headwinds are now receding. Interest rate relief is kicking in, tax cuts are starting to flow, and inflation is subsiding. But to date, the spending response has been lacklustre. Consumers are choosing to save much more than many economists expected. Perhaps households remain wary, preferring to rebuild nest eggs and pay down mortgages rather than splurge straight away. The market was again disappointed with this week’s retail sales update, a 3.3% rise in the year to May undershooting consensus.
But we think a turnaround is coming. The savings rate has climbed to around 5%, towards its long-run average. If, as we expect, it stabilises here, it should no longer be an anchor on spending growth. The recent house price acceleration also helps, as homeowners feel wealthier and have greater capacity to borrow and spend. Rising home equity is itself a form of saving, giving people confidence to spend a higher proportion of their income. We’ve also seen consumer sentiment recover from the extreme lows of the last few years. Conditions are ripe for a retail rebound.
Top picks priced for perpetual winter
But while the clouds are starting to clear, some retail stocks we cover don’t reflect this. For investors, we see a window of opportunity in a few beaten-down names priced as if the cost-of-living crisis drags on forever.
Endeavour Group
Endeavour (ASX:EDV), Australia’s largest liquor retailer and hotel operator, has struggled under cost pressures and weaker discretionary spending. We still see a big opportunity. Shares have greatly underperformed in recent years, but with rising incomes and a wide moat protecting market share, Endeavour looks well positioned for an earnings recovery.
Endeavour’s retail business generates the majority of earnings. Dan Murphy’s and BWS have unrivalled scale in Australian liquor retailing, accounting for about half the market. While some point to falling alcohol consumption per capita as a sign of imminent structural decline, this ignores the favourable premiumisation trend. We might drink less alcohol, but we’re buying higher-priced, higher-margin, up-market products. This trend was stalled with the cost-of-living crisis and normalising at-home liquor consumption after COVID, but volume growth is now reverting back to the long-run trend of about 2% a year [Exhibit 3].
Exhibit 3: After volatile times consumption almost back on trend
Source: Australian Bureau of Statistics, Morningstar.
Domino’s Pizza
Sentiment around Domino’s (ASX:DMP) has collapsed. Investors copped another blow on Wednesday with CEO Mark van Dyck to leave after less than a year, shares down 16%.
It’s frustrating. Domino’s misread demand in the pandemic, expanding too quickly and taking on speculative markets like Taiwan, Malaysia, and Cambodia. At best, these proved a distraction; at worst, holes for capital. Van Dyck shut some stores but left before a much-anticipated strategic update.
The question is whether Domino’s is still a turnaround. We believe it is. While there is perhaps not as much potential to expand as previously thought, we still see a compelling growth option that’s not in the share price. Trading on 15 times earnings, the market is saying Domino’s is ex-growth: no more stores, and no margin improvement. In mid-2021, the stock traded on a P/E of about 60!
Domino’s is still likely to have some tough times ahead in the near-term. But the bar set by the share price is now so low that even a modest improvement in earnings or store numbers could drive meaningful upside. Domino’s is a globally proven concept, and like many fast-food chains, is traversing cyclical weakness. But we think the brand is intact, and solid management execution can see a credible path back to growth and appropriately higher multiples.
Accent Group
The footwear retailer behind The Athlete’s Foot, Hype DC, and Platypus was harshly punished for its recent trading update. Like-for-like sales fell 1% in the year to June 2025 and discounting eroded gross margins, triggering a brutal 25% share price fall on what was only a few months of soft trade. Earlier this year, Accent (ASX:AX1) was trading above our fair value estimate, but this selloff has pushed shares into materially undervalued territory, opening a window of opportunity for this high-quality, moated retailer.
Accent dominates Australian footwear, accounting for roughly a quarter of all sales—far ahead of number two player Munro, which has less than half its share. Its scale gives it unique leverage over multinational brands, driving gross margins well above retail peers. We expect margins to recover as discounting eases, with a stronger Australian dollar reducing imported product costs. Its private-label brands, while only 10% of sales, have on average doubled revenue each year since fiscal 2019, and offer a higher-margin growth avenue which investors aren’t being asked to pay for.
