Breville Earnings: Strong Brands Afford Pricing Power

We maintain our AUD 20 fair value estimate for shares in Breville BRG. 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.

We think Breville has pricing power and should be able to raise prices to defray input cost inflation. Gross margin improved to 35%, from about 34% in fiscal 2022, despite inflation in freight and production costs in particular. We think margin expansion demonstrates the significant brand strength underpinning the firm’s narrow economic moat. We lift our fiscal 2024 EBIT forecast by 2% to AUD 192 million—an 11% improvement on fiscal 2023. We forecast an operating income CAGR of 10% over the five years to fiscal 2028 thanks to 8% top-line growth and improving profitability from operating leverage and moderating cost inflation. We forecast modest operating margin expansion to about 13% in the next five years, from less than 12% in fiscal 2023.

The firm declared a final dividend of AUD 15.5 cents per share, bringing total fiscal 2023 dividends to AUD 30.5 cents per share, fully franked. We expect Breville to comfortably maintain the dividend payout ratio at about 40% of aftertax earnings without compromising geographical expansion plans—included the flagged entry into South Korea. Breville’s balance sheet is in excellent condition, with AUD 121 million net debt (representing net debt/EBITDA of about 0.6) and AUD 349 million in headroom.