Company Reports

Breville's premium position in niche European and North American small appliances should continue to bear fruit, with strong earnings growth buoyed by continued global expansion. The company’s range of small electrical appliances has established significant brand strength, underpinning the firm's durable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 10% to 30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

Breville’s revenue growth is slowing. With elevated cost-of-living pressures, discretionary spending is front-of-mind for consumers. Breville’s small kitchen appliances are discretionary products, and a weaker consumer is a key cyclical risk to a firm selling premium-priced products. First-half fiscal 2024 revenue lifted just 2% compared with the previous corresponding period. Nespresso sales in the Americas recovered and revenue from newer, mostly European territories grew 73%—albeit off a low base. This was offset by weaker consumer spending, particularly in Australia, a lack of promotional activity, and the 2023 bankruptcy of major U.S. customer Bed Bath & Beyond.

We make no changes to our AUD 20 fair value estimate for shares in Breville. Breville is a high-quality company, with significant brand equity that underpins its narrow economic moat. The company also has a long runway of growth as it expands into new countries and product categories. But shares screen as expensive at about a 30% premium to our valuation. With elevated cost-of-living pressures, discretionary spending is firmly in the spotlight. Purchases of Breville products are discretionary, a weaker consumer is a key cyclical risk to a firm selling premium-priced products.

We maintain our AUD 20 fair value estimate for shares in Breville. Despite a relatively challenged macroenvironment, including input cost inflation, the bankruptcy of major U.S. customer Bed Bath & Beyond, and generally weaker consumer spending, fiscal 2023 operating earnings increased by 10% to AUD 172 million—at the top end of the February 2023 guidance range and 1% above our forecast. Headwinds were more than offset by geographic expansion, price increases, and earnings from the AUD 140 million Lelit acquisition.

Data from the Australian Bureau of Statistics shows retail turnover in electrical and electronic goods, which includes electric appliances such as Breville's, has softened in recent months. In the fiscal year to April 2023, seasonally adjusted trade has fallen 1% compared with the previous corresponding period, or PCP. We expect discretionary goods consumption will remain under pressure in the near term as households absorb higher interest repayments and continue to rebalance toward a higher share of services spending. Accordingly, we reaffirm our 3% top line growth forecast for Breville’s Asia-Pacific product segment in fiscal 2023, a marked slowdown from 19% growth in fiscal 2022. Asia-Pacific sales account for around 20% of consolidated revenue.

We maintain our AUD 20.00 fair value estimate for shares in Breville following the release of interim fiscal 2023 results. Underlying EBIT lifted 8% on the prior corresponding period, or pcp, to AUD 121 million. Revenue growth slowed quicker than anticipated in the traditionally stronger first half (which includes the key Christmas period). We lower our fiscal 2023 EBIT forecast by 3% to AUD 170 million—near the top of management's guidance range of AUD 165 million to AUD 172 million. Breville declared a fully franked interim dividend of AUD 0.15 per share, flat on the pcp. We forecast total fiscal 2023 dividend of AUD 0.33, representing a payout ratio of about 40% of underlying EPS.

While still trading in 3-star territory, shares in Breville are beginning to look cheap, trading at about 9% below our unchanged AUD 20.00 fair value estimate. Breville last traded with a 4-star rating when coronavirus pandemic pessimism reached its peak in March 2020, with shares plummeting as low as AUD 10.00 in intraday trade. But the opportunity was short-lived. Shares quickly returned to lofty heights as Breville's sales continued to grow strongly despite COVID-19 shutdowns of many retailers in key markets, demonstrating the significant brand strength underpinning the firm's narrow economic moat. Increased time spent at home amid movement restrictions was also beneficial for many of Breville's small kitchen appliances such as coffee machines, sandwich presses, and blenders. But shares have fallen about 44% since the beginning of calendar 2022 as inflationary pressures weigh on freight and production costs, geographic expansion slows, and cost of living pressures appear set to soften demand for discretionary goods.

We maintain our AUD 20.00 fair value estimate for shares in narrow-moat Breville following the release of fiscal 2022 earnings. Underlying operating earnings lifted 15% to AUD 156 million (albeit 6% lower than our AUD 167 million forecast) as full-year contribution from Mexico, Portugal, and Italy bolstered Breville's revenue base and new product launches drove earnings growth in existing regions. We think the onset of COVID-19 and increased working from home has further fueled strong demand for small home appliances since the onset of the pandemic, and Breville likely benefited from an increased uptake of online shopping where consumers tend to favour trusted, well-known brands such as Breville and Sage. The board declared a fully franked final dividend of AUD 30 cents, representing a payout ratio of 40% of underlying EPS. With just AUD 4 million in net debt, Breville's balance sheet remains in excellent condition, and the firm has sufficient headroom to comfortably maintain its payout ratio of around 40% of earnings without stretching its balance sheet or compromising expansion plans.

We expect Breville's premium position in niche European and North American small appliances to continue to bear fruit, with strong earnings growth buoyed by continued global expansion. The company’s range of small electrical appliances have established significant brand strength, underpinning the firm's sustainable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 15% to 30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

Breville is a well-run company with high-quality brands. We assign the firm an Exemplary capital allocation rating based on our assessment of balance sheet risk, investment efficacy, and shareholder distribution. The earnings outlook for the small appliance manufacturer is bright. Geographic expansion continues to drive top-line growth, and we expect coronavirus restrictions have fuelled strong demand for small home appliances since the beginning of the pandemic. Breville likely benefited from an increased uptake of online shopping where consumers tend to favour trusted, well-known brands, illustrating the strength of the Breville and Sage brands, which underpin the firm's narrow economic moat. We think Breville's fiscal 2021 EBIT guidance of AUD 136 million is slightly conservative and forecast fiscal 2021 operating earnings of AUD 138 million--an increase of 22% on fiscal 2020. We anticipate continued geographical expansion driving higher sales volumes, and lower promotional activity and favourable mix shift toward the lucrative global product segment leading to a small improvement in group operating margins.

We expect Breville's premium position in niche European and North American small appliances to continue to bear fruit, with strong earnings growth buoyed by continued global expansion. The company’s range of small electrical appliances have established significant brand strength, underpinning the firm's sustainable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 15% to 30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

We raise our fair value estimate for Breville Group by 6% to AUD 18 per share due to upgraded near-term earnings forecasts and time value of money. First-half EBIT increased 30% versus the prior comparable period, or PCP, to AUD 95 million as coronavirus restrictions fuelled strong demand for small home appliances. Breville likely benefited from increased uptake of online shopping where consumers tend to favour trusted, well-known brands, illustrating the strength of the Breville and Sage brands, which underpin the firm's narrow economic moat. We lift our fiscal 2021 EBIT forecast by 7% to AUD 138 million due to higher sales volumes, a small improvement in group margins from lower promotional activity, and favourable mix shift toward the lucrative global product segment. Accordingly, we think Breville's upgraded fiscal 2021 EBIT guidance of AUD 136 million (from AUD 128 to AUD 132 million previously) is conservative.

We expect Breville's premium position in niche European and North American small appliances to continue to bear fruit, with strong earnings growth buoyed by continued global expansion. The company’s range of small electrical appliances have established significant brand strength, underpinning the firm's sustainable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 15% to 30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

We expect Breville's premium position in niche European and North American small appliances to continue to bear fruit, with strong earnings growth buoyed by continued global expansion. The company’s range of small electrical appliances have established significant brand strength, underpinning the firm's sustainable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 15% to 30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

We raise our fair value estimate for narrow-moat Breville to AUD 17.00, from AUD 16.50, following the 2020 AGM and release of fiscal 2021 guidance. The increase is principally due to time value of money. Breville provided fiscal 2021 EBIT guidance in the range of AUD 128 million to AUD 132 million. We lift our fiscal 2021 EBIT forecast by 2% to AUD 129 million on higher sales volumes as elevated demand enjoyed in late fiscal 2020 appears to be persisting in most geographies. COVID-19 shutdowns and movement restrictions have been beneficial for many of Breville's small kitchen appliances such as coffee machines, sandwich presses, and blenders. In markets with more severe lockdowns, online shopping is the only option, and customers have gravitated to known and trusted brands, illustrating the strength of the Breville and Sage brands which underpin Breville's narrow economic moat.

We maintain our AUD 16.50 fair value estimate for shares in Breville following the release of fiscal 2020 results which were broadly in line with our forecasts. The company's revenue continues to grow strongly despite shutdowns of many retailers in key markets in the second half. Breville increased fiscal 2020 sales by 25% to AUD 959 million, marginally ahead of our prior forecast of AUD 932 million. In markets with more severe lockdowns, online shopping is the only option, and customers have gravitated towards known and trusted brands, illustrating the strength of the Breville and Sage brands which underpin a narrow economic moat. Our forecasts now include the impact of the new accounting standard for leases, AASB 16. The firm declared a final dividend of AUD 20.5 cents, bringing full-year distributions to AUD 41 cents, 60% franked.

We recommend investors do not to subscribe Breville's share purchase plan, or SPP. While the SPP is at a 14% discount to the last traded price of AUD 19.81, the offer is priced at a small premium to our fair value estimate--within 3-star territory--leaving little margin of safety. We raise our fair value estimate by 3% to AUD 16.50. Half the increase is due to the time value of money, with the balance from an increase to our near-term earnings forecasts and the slight accretive impact of the equity raising. Demonstrating the significant brand strength underpinning the firm's narrow economic moat, Breville's revenue growth continues to perform strongly despite shutdowns of many retailers in key markets, and we have adjusted our near-term forecasts accordingly. Shares in Breville continue to screen as overvalued.

We raise our fair value estimate for Breville to AUD 16.00 per share from AUD 11.20 following the transition to a new analyst. Breville's range of small electrical appliances have established significant brand strength, as demonstrated by the firm's ability to charge a substantial price premium to competitors--notably in the United States and Europe--underpinning the firm's narrow economic moat. Breville are exemplary stewards of capital. The firm's foray into Europe is demonstration of this. We forecast the firm's European expansion, and continued solid growth in North America, will drive an EPS CAGR of 13% over the five years to fiscal 2024. However, there is execution risk in rapid expansion, and our high uncertainty rating remains intact. Despite the 43% rise in our fair value estimate, shares in Breville remain materially overvalued. We also increase our fair value estimate for no-moat Premier Investments by 3% to AUD 16.00 per share given their 28% ownership in Breville.

We are placing narrow-moat Breville under review following strong first-half earnings. Excluding the impact of the new accounting standard for leases, AASB 16, first-half underlying EBIT of AUD 72 million was 16% above the previous corresponding period, or pcp. Management’s full-year fiscal 2020 guidance for pre-AASB16 EBIT of around AUD 110 million is in line with our current fiscal 2020 forecast, but the company's solid performance across all segments, and especially in Europe, suggests our longer-term projections are too pessimistic. We intend to update our forecasts and fair value estimate over the next two business days.

We make no changes to our AUD 11.20 fair value estimate for shares in Breville Group. Breville is a high-quality business. The firm enjoys significant brand strength, with its small electrical appliances commanding a substantial price premium over competitors--particularly in the United States. We see this as sustainable given the firm's extensive track record of reinvestment, underpinning its narrow economic moat. We continue to project an EPS CAGR of 12% over the five years to fiscal-year 2024 driven by the continuation of strong sales growth in North America, and the successful launch of the Sage brand in Europe. However, we do not expect the Sage brand to replicate the success of Breville in North America and believe the market remains too optimistic about Breville's prospects in Europe. Last trading at AUD 17.44, shares in Breville continue to screen as expensive.