There could be as much as $4 billion burning a hole in the collective pockets of consumers thanks to lower petrol prices this year, with the nation’s retailers now praying next month’s budget will help them capture that extra cash before it’s squirrelled away in savings accounts.

The latest Citi report said retailers were experiencing the strongest sales trends in four years as total retail sales gained 5 per cent in the six months to December 2014, led by hardware, furniture and electronics.

But Citi’s Craig Woolford said profit margins remained on a “knife edge’’ and many in the sector were struggling to lift gross margins despite strong sales — instead being forced to squeeze better rent deals and hack away at marketing budgets.

And it is expected to be another tough year for leading supermarket giants Woolworths and Coles, with both losing market share in the December quarter to aggressive German discounter Aldi and US warehouse chain Costco.

Mr Woolford said Woolworths lost 130 basis points of market share in the quarter, while Coles was down 33 basis points, marking the fourth consecutive quarter of the trend as Aldi and Costco accelerated thanks to store openings and customers warming to their formats.

Next month, Woolworths will unveil its strategy to retake the mantle as the category leader on price and value by investing more than $500 million over the next two years into food and grocery pricing, as well as improving service. It comes as $4bn in extra spending capacity goes up for grabs due to lower petrol prices — about $1.30 a litre compared with an average of $1.48 in 2014. Citi believes the annual saving of this lower petrol price is $9 a household a week.

“While a modest saving, when combined with lower interest rates, households may spend this petrol benefit,’’ Mr Woolford said. “We calculate the potential uplift to retail sales growth at 1.3 per cent if the petrol benefit is spent.’’

The outlook for the next six months is mixed, according to Citi. Last year’s poorly received budget — which spooked consumers — and lower petrol prices will provide a tailwind for the second half of 2015. But currency headwinds in the form of a lower Australian dollar, which raises import costs, persist.

“(Pretax) margin protection is the name of the game,’’ Mr Woolford said, adding the three key areas of cost savings for retailers would include beating down rental costs, tightening marketing budgets and carbon tax relief.

“Retail stocks are being priced for an upswing in retail sales. Many are trading at higher than average P/E ratios, which will likely be hard to sustain unless sales, and earnings upgrades ­follow through.”

Citi’s preferred stock is Super Retail Group given the company’s scope to increase both sales and profit margins. Citi has a sell rating on Harvey Norman, JB Hi-Fi, Myer and Woolworths.

“We also see downside for Wesfarmers which is priced for a continuation of strong sales momentum, which may slow at both Coles and Bunnings.’’

Extracted in full from The Australian.