Chart of the Week: Opportunities with wide-moat retailers
Consumer defensive names look undervalued.
Mentioned: Endeavour Group Ltd Ordinary Shares (EDV), Accent Group Ltd (AX1), Domino's Pizza Enterprises Ltd (DMP)
This week’s Chart of the Week comes from Morningstar’s Equity Research team’s Industry Pulse: Retailing 2025 Q3.
The retailing industry’s operating environment is normalising after a period of outsize influences on profits. Sales growth is around trend levels, cost inflation is abating and no longer a threat to profit margins, and the impact from US tariffs is likely to be insignificant for Australian retailers.
We expect industry growth to pick up slightly, to 4% in fiscal 2026. This is underpinned by a tight job market, rising wages, a relatively stable savings rate, and more optimistic consumers following multiple interest rate cuts.
There are initial signs of a solid year for Australian retailers. Broadly strengthening sales momentum in the latter half of fiscal 2025 is largely continuing into the new fiscal year.
Only JB Hi-Fi, Rebel, and Big W are having a slightly weaker start. Supermarkets Woolworths and Coles are seeing grocery sales increase by midsingle digits, led by volume growth, not rising shelf prices.
Without the large external influences on profits of recent years, we think investors will focus more on competitive dynamics within each retailing category and longer-term industry trends.
For instance, we expect Woolworths to cut prices to regain market share, ultimately weighing on gross profits of both majors. We forecast the online grocery sales of Coles and Woolworths to outperform in-store sales. While the online grocery channel is less profitable, it provides the opportunity to take market share from the IGA network and Aldi, which don’t have a strong online presence.
Our moated stocks (those that have a sustainable competitive advantage) are amongst the most attractive in the sector, including Domino’s DMP, Accent AX1 and Endeavour EDV. You can find our top picks in the full report, available for Morningstar Investor subscribers.
You’re able to find previous editions of Chart of the Week here.
