The times are good for many retailers, with spending hitting record highs this year. Despite rising inflation and mortgage interest rates, households are continuing to spend, cashed up as they are after the pandemic. But retailers’ profit margins may narrow in the months ahead, especially for discretionary retailers, as some consumers curb their spending as interest costs mount.

According to the most recent data from the Australian Bureau of Statistics, retail sales rose 1.3% in July 2022 from June to a record $34.7 billion. That was 16.5% higher from a year earlier and economists expect the momentum to continue over the remainder of the year given the tightness of the labour market and despite another 50 basis point rise in official interest rates in September.

Retailers have benefited across most segments. Sales growth in July was strongest at department stores, up 3.8%, followed by clothing, footwear, and personal accessory retailing (3.3%), as well as cafes, restaurants, and takeaway food services (1.8%). However, in a sign that more difficult times could be ahead for some discretionary retailers, household goods retailing fell for the third time in four months, down 1.1% in July 2022, according to the ABS data. The outlook is mixed for other retailers, however supermarkets earnings and profits are expected to remain resilient.

Coles (ASX:COL)

Rising grocery prices have benefitted the earnings of the supermarkets. Coles recently reported a bumper $1.05 billion profit on the back of $39.4 billion in revenue, of which most came from its supermarkets at $34.6 billionReflecting this, supermarket gross margins improved substantially to 26.3% in fiscal 2022 from 25.9% a year earlier.

However, while rising grocery prices boosted supermarket earnings over the 2021-22 fiscal year, Morningstar retail analyst Johannes Faul expects the trading environment in the Australian food industry to normalise by fiscal 2024. Profit margins could contract given rising costs and, as people head out to restaurants to eat, Faul expects and earnings growth of -1% for Coles in the current fiscal year.

“Inflation in costs and shelf prices, more out-of-home food consumption and declining sales volume, evaporating COVID-19 expenses—these are the three key challenges and opportunities we see for Australian supermarket operators in fiscal 2023,” says Faul.. He believes Coles is fairly valued at $13.60, compared to its price of $17.29 giving it just one star from Morningstar.

Woolworths (ASX:WOW)

Grocery retailer Woolworths has produced a $1.5 billion dollar profit for the 2022 financial year. Full year sales jumped by almost 10% to $60.8 billion and its gross margins in its Australian food division expanded to 30.4% up from 29.7%. Faul expects earnings growth for the Woolworths group of 12% for FY 2023. “Woolworths has more earnings momentum than Coles because its Big W stores are expected to do better in fiscal 2023 than they did in 2022. Sales growth was just under 30% for Big W for the first 8 weeks of this financial year, which is driving its earnings per share outperformance relative to Coles,” says Faul. The one star stock currently has a fair value of$26.50, well below its price of $35.95.


Australia’s largest home entertainment retailer is likely to see its earnings growth pull back in fiscal 2023 as higher rates hit households, according to Faul. Sales momentum is still solid, but Faul expects consumers to materially cut back their spending on consumer electronics and home appliances as rates rise. As a result, Faul expects JB Hi-Fi's Australian sales will materially weaken in the current financial year and, at $42.61 per share, JB Hi-Fi is overvalued, sitting in two-star territory. 

Coinciding with softening sales growth, Faul expects cost inflation including higher wages to see profit margins to weaken in fiscal 2023.

Harvey Norman (ASX:HVN)

Harvey Norman's profit margins have been supported by higher selling prices with inflation in categories like home appliances, furniture and bedding boosting its earnings. However, Faul forecasts competition to intensify and discounting to increase in consumer electronics and furniture sales to weaken in fiscal 2023 as interest costs rise. He places the fair value of the stock at $3.90 compared to its current price of $4.50, giving it a three-star Morningstar rating.

“Harvey Norman is faced with new competition from pure online players which contend for consumers migrating to the online channel,” he said.

“We expect Amazon Australia to gain traction over the medium term and to become one of Australia’s most formidable competitors in consumer electronics,” added Faul. (ASX:KGN)

Morningstar’s Faul is more upbeat on Kogan. Having fallen hard over the past year, he says the stock is undervalued, with a five-star rating from Morningstar. Faul has a $11.70 per share fair value estimate for no-moat Kogan, compared to its current price of $3.82. He expects Kogan to improve its earnings margins in fiscal 2023 as its focus remains on cost efficiency. While he estimates gross sales declined by more than 20% in July 2022 versus July 2021, when sales were elevated due to lockdowns, nevertheless he expects Kogan's growth to regain momentum in fiscal 2023 after exceptionally strong COVID-19-induced prior period sales growth passes. Faul estimates group gross sales will increase 5% and average 6% per year over the next decade.