Breville’s Sales Momentum Is Slowing, but Margins Continue to Strengthen

We maintain our AUD 20 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.

Revenue grew just 1%, as strong growth in Americas was offset by retailer destocking in Europe and Ukraine sourcing disruptions weighing on Nespresso. Cost of living pressures are set to soften demand for discretionary goods, and retailers in Europe appear particularly wary. In Europe, Breville is noticing a discrepancy between sell-in (what Breville sells to retailers) and sell-out (what retailers are selling to consumers). While sell-out revenue in EMEA grew by low single digits during the period, sell-in dropped about 20% on a constant currency basis. Breville did not participate in market discounting to encourage sell-in, assisting with margin improvement.

While inflationary pressures weighed on inputs costs during the period (notably freight and production), gross margins improved to 35%, from 34% in the pcp. Breville managed to increase prices (and minimal promotional activity) to more than offset rising input costs, demonstrating the significant brand strength underpinning the firm’s narrow economic moat. We think Breville can maintain current gross margins through the second half as input costs begin to moderate.