Company Reports

Some of wide-moat Endeavour’s customers are struggling, and sales growth is below our long-term trend estimate. An earlier Easter break supported group sales of 2% in the third quarter of fiscal 2024. Normalizing for the Easter boost, group sales of only 1% are tracking with our muted fiscal 2024 forecast. In the June quarter, sales growth is still hovering at around 1%. However, we expect consumer demand for discretionary items to pick up in fiscal 2025, including liquor, out-of-home meals, and entertainment. Key drivers are wage growth, meaningful tax cuts, and potential interest rate cuts. For more details on near-term drivers for the retailing sector, please refer to our Retailing Industry Pulse published on March 26, 2024.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

Endeavour is Australia's pre-eminent omnichannel liquor retailer, operating the largest network of brick-and-mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy's and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. Endeavour is one of Australia's leading employers, with staff of more than 28,000 throughout Australia.

Wide-moat Endeavour’s first-half fiscal 2024 sales and earnings are tracking marginally below our expectations, and sales momentum is weakening slightly. In the first seven weeks of the second half, retail and hotels segment sales were virtually flat, with consumers reining in spending on liquor and food. In comparison, Woolworths’ Australian food sales are up only 1.5% over the same seven-week period versus the previous corresponding period. We trim our sales growth forecast for Endeavour to 2% in fiscal 2024 versus 3% previously, adjusted for an additional trading week in fiscal 2024. With our forecast sales growth in the low-single digits, we expect EBIT margins to remain soft for the remainder of the year, down some 20 basis points on the PCP. In the first half, EBIT was flat versus the first half of fiscal 2023. We decrease our fiscal 2024 EPS estimate by 3%, but our long-term forecast is virtually unchanged.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

Shares in wide-moat Endeavour trade at a material 17% discount to our unchanged AUD 6.10 fair value estimate, despite our more cautious view on the near-term outlook for its hotels segment compared with management. By fiscal 2028, management aims to increase the hotels business'—generating about one-third of group earnings—EBIT by at least AUD 150 million versus fiscal 2023. In isolation, such an uplift would boost our valuation by about AUD 1 per share, or 17%.

We maintain our AUD 6.10 fair value estimate for wide-moat Endeavour. Group sales growth of 2% in the first quarter versus the previous corresponding period is slightly below our unchanged full-year estimate of 3%—adjusted for an additional trading week in fiscal 2024. Shoppers are trading down, buying mainstream beer brands instead of craft beers. The Dan Murphy’s chain with its lowest liquor price guarantee is well-placed to capture market share in a softer economic environment.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We maintain our investment thesis and AUD 6.10 fair value estimate for wide-moat Endeavour. Fiscal 2023 results were broadly in line with our expectations. Net profit after tax of AUD 529 million beat our estimates by 3%, largely driven by stronger-than-expected operating profit margins in the hotels segment.

We forecast the proposed gaming restrictions unveiled by the Victorian government to weigh on Endeavour’s long-term earnings. However, we estimate the impact on the group’s intrinsic value to be less severe than the market anticipates—considering the 10% decline in Endeavour’s share price on the back of the news. While we also expect New South Wales to follow suit, we estimate the combined decline in earnings at a relatively moderate 7% from fiscal 2025, with the valuation impact partially offset by the time value of money. We lower our fair value estimate on Endeavour by 5% to AUD 6.10 and shares screen as undervalued. We expect Endeavour’s larger retail segment—accounting for about 60% of group earnings and underpinning its wide economic moat—to be unaffected to changes in gaming regulation. Endeavour’s management hasn’t provided quantitative guidance on the impact of the Victorian reforms.

We maintain our AUD 6.20 fair value estimate for wide-moat Endeavour Group following the September-quarter trading update that was broadly aligned with our expectations. Varying degrees of coronavirus-related trading restrictions throughout Australia, with particularly strict lockdowns in Victoria and New South Wales, materially affected operating conditions during the September quarter. The trading restrictions continued to support the elevated levels of at-home consumption since the onset of the pandemic. While sales within the retail segment were flat on the same period in fiscal 2021, they remain approximately 20% above prepandemic levels. Sales within the hotels segment were down approximately 10% on the same period in fiscal 2021, which was also partially restricted by lockdowns, and around 40% below prepandemic levels.