Retail & Gaming: Review of the FY22 reporting season

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

07 September 2022, 7:00 AM

Sectors Covered:

Gaming and Retail

• FY22 was a challenging year for many retail and gaming businesses. Extended lockdowns in Sydney and Victoria led to the enforced closure of a large number of retail stores and entertainment venues between July and October 2021. But when the doors reopened, demand was strong. With unemployment at near-record lows and household savings still elevated, consumers continued to spend through 2H22 and into 1H23, as yet undaunted by concerns about the rising cost of living and higher interest rates. What this meant was that FY22 earnings in the consumer discretionary sector, though generally lower than in FY21, were by no means calamitous. 
• The median change in our FY23 EBIT forecast was just +0.1%. We moved numbers by more than 10% in either direction for only two companies: STP and LOV, both upgrades. LOV was the clear highlight of reporting season.

Our universe reported 9% lower EBIT, 2% higher than forecast

Our universe reported a median EBIT decline of 9%, beating our forecasts by a median of 2%. The most notable EBIT beats were from LOV (20%, excluding LTIs), SUL (15%) and BLX (14%).

All three of these companies reported better sales and margins than we, and the market, had expected. The biggest EBIT miss was from DMP as a result of severe (but we think temporary) margin contraction in Europe. The median like-for-like sales growth in our universe was +0.3% in FY22, down from +10.3% in FY21.

There was an even distribution of upgrades and downgrades to estimates

Upgrades and downgrades to FY23 EBIT forecasts were evenly distributed in our universe. The biggest upgrades were STP (+29%, off a low base) and LOV (+13%, off a much higher base).

The largest downgrades were to ADH, for which we cut our estimate by (8)% and DMP, for which we lowered by (6)%. Share price reactions generally tracked the size and direction of consensus revisions to forward earnings estimates.

Inflation was a major talking point

Of course, we came into reporting season primed to expect companies to highlight cost inflation as a reason for posting disappointing margins (they didn’t) and as a reason for being cautious about future margins (they did).

After all, you’d have to have been living under a rock since late last year to have missed that nearly everything is getting more expensive. Most retailers expect around 5% inflation in wages in FY23, in line with the General Retail Award, though rents look likely to rise by less, and there are signs of a moderation of freight costs.

Price rises are sticking for now, but promotions are starting to intensify

Many retailers reported they have already started to increase their selling prices to protect their margins from the effects of input cost inflation.

A number of companies said these price increases had been accepted by customers without any apparent reduction in demand. That said, the greater availability of stock, means that promotional activity is starting to pick up in certain segments.

Figure 1: Change to FY23F EBIT forecast compared with share price reactions

Source: Morgans estimates, IRESS

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