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The middle ground of Australian retail has shrunk, giving way to those that sit on either side, and paving the road ahead for a split market in 2025. 

This is according to analysts at investment bank Jarden in a recent note to investors, where they claim to see retail bifurcation continuing through 2025 after calling it in late 2024, with share gains and margin expansion key to outperformance.

“Retail is bifurcating and so are market expectations, with quality growth re-rating and (perceived) lower quality de-rating,” the note read.

Retail bifurcation is not just in terms of pricing, where luxury and cheap retailers thrive in lieu of medium-priced businesses, but also regards large players and small players, with mid-size retailers struggling, and the split between online and experiential in-store shopping. The latter means that traditional mid-market brick-and-mortar retailers may struggle if they don’t have a strong online presence or unique in-store experience. 

In an earlier note, Jarden analysts claimed the retail market has become more bottom-up driven compared to top-down, "whereby retailers that consistently grow share, margin and surprise positively re-rate, and defensive sectors de-rate."

They said the keys to retail success now include share gains via top-line performance, highlighting JB Hi Fi and Wesfarmers (Kmart and Bunings) as leaders over the past five years.

The other success factors include margin expansion through the leveraging of scale to lift profitability and earnings per share (EPS) surprise, with Super Retail Group (Rebel and Macpac), Wesfarmers and JB Hi Fi listed as leaders in margin expansion.

“The benefit of being in these buckets is a premium multiple; successful category killers trade at c25% higher PE multiple vs others,” Jarden analysts wrote. “We also look offshore, with scope for further re-rating if domestic retailers expand into adjacencies, increase TAM [total addressable market] and deliver cost efficiencies.” 

Analysts added that Walmart in the United States saw a re-rating of more than 20 per cent through 2024 as the market gains confidence in its ability to monetise these and drive TAM and cost efficiences and drive positive EPS revisions. 

They then conclude that JB Hi Fi and Super Retail Group look most attractive if the momentum of the past five years can be maintained, while Wesfarmers looks fair. Meanwhile, they claim that Woolworths Group – which also owns Big W – looks better positioned compared to Coles, “but needs to get the core business moving, which should happen in 2H FY25, in part aided by easier comps.” 

Looking ahead, Jarden analysts sees the backdrop for spending into 2025 as positive, with savings being elevated, confidence ticking up and the prospect of a rate cut building - “this is all leading to more optimism amongst retailers.”

“Further, 1H25E results should be increasingly de-risked, with major sales events (Black Friday, Cyber, Boxing Day) showing growth year-on-year, with three major banks' data pointing to consistent results.”

However, the analysts see risk across liquor, department stores and grocery categories, with spending muted and competition up.

“Data for January suggest discretionary (goods) spending has remained resilient and up 3.2 per cent according to Kepler, while services and staples have been weaker.”

For the upcoming reporting season, Jarden analysts will be focused on four key factors. The first is on January updates, where they expect discretionary to be in line/ahead, staples weaker. The second is costs, notably impacts from FX, freight and labour “which creates risk into 2025 – particularly for apparel.”

The final two are competition and earnings revisions, with Jarden analysts claiming the outlook for gross margins and impact on online pure plays and new entrants, which follow the closure of Catch marketplace and the overall wind down of Mosaic Brands’ portfolio.

As for earnings revisions, the analysts cite signs of inflection points, with quick-service restaurants and grocery the focus, “and whether they can arrest 12 months of negative revisions, although we see this as still six months away.” 

And while household goods will likely move up, Jarden sees growing upside risk to travel.