The latest industry pulse report on the retail sector provides a gauge on the industry, including the challenges for retailers and opportunities for investors. 

We take a look at four charts from a report by Morningstar director of equity research Johannes Faul to better understand the pulse of the industry. 

Investor subscribers can get full access to the report here.

1. Discretionary retailer trading updates are downbeat, but upside for some.


With a booming six months to Christmas, the first quarter highlights a sombre outlook. 

Faul notes the trading updates showed that sales growth materially weakened for omnichannel retailers (that is, both online and physical stores) including Harvey Norman (HVN) and JB Hi-Fi (JBH).

However, Faul sees upside for some service-exposed businesses such as Domino’s Pizza (DMP) and InvoCare (IVC).

Chart 1: Ominchannel retailers have started losing sales momentum in calendar 2023

Chart 1

2. Supermarket giants losing market share 


Unusually high food price inflation has helped the two supermarket majors expand gross profit margins, but at the cost of market share.

Faul sees a risk that discounters and independents grab more market share, reversing the recent margin gains, with Metcash (MTS) and Endeavour (EDV) the most attractive defensives. 

Chart 2: Fairly valued Metcash and Endeavour are the most attractive defensives

Chart 2

Read more about how discount supermarket Aldi is gaining on Woolworths and Coles here.

3. E-commerce growth likely to return as demand normalises


From fiscal 2024, Faul predicts e-commerce to outperform brick-and-mortar retailing with high-single-digit annual growth rates.

Again, Kogan (KNG) is well placed to benefit from this structural shift away from physical stores, a view Faul shared in his previous note on the sector’s outlook.

As of 24 March 2023, Kogan was trading at a 62% discount to Morningstar's $10.70 fair value estimate, which Faul ascribes to a material decline in sales and earnings from 'boomtime levels'.

Chart 3: Online penetration increased in late 2022, breaking the recent downtrend 

Chart 3

4. Dining out is back, but on the cheap


Momentum for dining out by consumers continued in the first quarter but Faul expects cost-of-living pressures to impact. Goodbye high-end restaurants and hello cheaper takeaways.

Acknowledging that there needs to be a balance between market share and profit, Faul believes that Domino’s Pizza is well placed in that environment.

Chart 4: Supermarket and liquor sales below trend… but restaurants and cafes outperformed

Chart 4