Goldman Sachs remains bullish on staples even after Australian retail sales slump in December

Tuesday marked an abrupt plummet for Australian retail sales, down -3.9% month-on-month in December and marking the first monthly decline since December 2021.

The fall was well-below Bloomberg estimates of a 0.4% increase and also the fourth largest decline on record (second if you exclude Covid-related data).

“The large fall in December suggests that retail spending is slowing due to high cost-of-living pressures. Retail businesses reported that many consumers had responded to these pressures by doing more Christmas shopping in November," said Ben Dorber, ABS Head of Retail Statistics.

Source: TradingEconomics

Food retailing was the only industry to post an increase, up 0.3%. While the cafes, restaurants and takeaway food segment was relatively unchanged compared to the previous month.

Goldman Sachs: Staples a key positive

Goldman Sachs said they were "not surprised ... that a pull forward in November Cyber Weekend sales as well as a combination of warm weather and strong outbound travel" resulted in a muted Boxing Day sales period.

The analysts note that the Food and Liquor category was the only category that accelerated in December, up 8.2% year-on-year compared to 5.4% in the first half of FY23.

As a result, the investment bank reiterated its key stock calls as outlined in its 1H23 result preview for Consumer and Retail stocks. Their key picks include:

Woolworths (Buy, $41.20 target price): Goldman expects 1H21 group sales growth of 3.5% but EBIT growth of 12% on higher margins.

Endeavour Group (Buy, $7.80 target price): Recent discussion on NSW gaming regulatory tightening has weighed on Endeavour's recent share price performance. The investment bank notes that gaming reflects approximately 45% of hotel revenues but the decline in share price "largely reflects the potential implementation". A strong retail and hotels result is expected amid accelerating liquid retail sales. Hotel sales forecast to recover to at least 15% of pre-Covid levels.

Breville (Buy, $23.50 target price): Goldman believes that the "secular trend of coffee consumption upgrade continues globally" and that Breville will stand to benefit as a leader in this space. This was evidenced by better-than-expected December quarter results from the company's rival De-Longhi. The investment bank expects 1H23 net profits and sales to grow around 6.1-6.2%.

Not all was positive, with two Sell ratings on two household names:

Coles (Sell, $14.90 target price): Elevated supply chain costs in the near-term is expected to pressure margins. Goldman forecasts Supermarket EBIT margins to fall around 30 bps to 4.7% and EBIT to fall -0.9% in FY23.

Wesfarmers (Sell, $42.20 target price): Wesfarmers was flagged as having the highest risk of volume deleveraging impacting margins. The investment bank said a key focus will be on the outlook into 2H23, where they expect Bunnings comparable sales to go negative (around -5%).

12-month share price performance for Coles (+8.3% – Yellow), Woolworths (+4.2% – Green), Endeavour Group (+3.7% - Orange), Wesfarmers (-5.5% – Pink) and Breville (-21.2% – Blue)