Key Points: 

  • The major supermarkets lost market share in the 6 months to December, with focus now on margins as they fight to get it back.
  • Traditional retailers saw their sales growth ease in early 2023, in a sign consumers may be winding back on spending.
  • Despite disappointing earnings, Faul says Domino's Pizza will continue to be a growth company, with shares undervalued.

Transcript: 


Johannes Faul: During reporting season two main trends were apparent to us. One was on the consumer staple side and what was interesting was that the majors in food retailing, so supermarkets, but also in liquor retailing lost market share. Woolies, Coles and Endeavour lost market share. However, the supermarkets still did really well on their earnings side, with their margins expanding and the question going forward now will be, will they cut prices or be more promotional than they have been to regain market share or to hold their market share and will margins suffer. So that's one aspect that we're looking at, especially looking into the second-half of this fiscal year.

On the cyclical space of the retailers and we're thinking JB Hi-Fi, Harvey Norman and the like that the traditional retailers there have seen their sales momentum slowing. So some of them still had sales growth post-Christmas, but every single retailer we've observed has had a lower sales growth in the first few weeks of 2023 than they had in the six month lead up to December. And that's really a potentially first indicator that we're seeing the consumer winding back on their spending. And we might have even seen that in recent ABS data. So from the Australian Bureau of Statistics showing that spending on goods as a proportion of total spending is coming off and people are spending more on services, including interest payments on mortgages.

One of the stocks that disappointed, during reporting season was Domino's Pizza (DMP) and what they have seen is very high cost inflation, which forced them to increase their pricing. However, the increase in pricing was such that the demand was dropped off and hurt their earnings of that half. Now we believe that that's a temporary phenomenon and that will adjust. And Domino's will continue to be a growth company and continue to roll out stores internationally underpinning their intrinsic valuation. So for Domino's, we still see a bright future and those shares are undervalued at the moment.