We recently research Breville Group (ASX:BRG) in The Dynamic Investor. After a strong re-rating following the release of full-year results in August, the shares retraced in mid-October. The latter was due to market concerns about intensifying competition and increased US tariff risk post Trump re-election.

We took the view that the weakness in the share presented an opportunity. With the shares having since partially recovered, we consider whether current levels still present an entry opportunity.

About Breville Group

Breville Group manages several consumer electrical appliance brands. The Company’s core focus is on the small kitchen appliances segment. The operations of BRG now comprises two segments:

i. The ‘Global Product’ segment – focused on the design, development and sale of Breville-branded products supplied in 65 countries to the premium kitchen segment of the market. This segment accounts for 80% of group revenue and comprises contributions from three regions: Americas, Asia Pacific (APAC) and Europe Middle East and Africa (EMEA). The America region is the largest region for global product, accounting for ~50% of sales.

ii. The ‘Distribution’ segment, which distributes products that are designed or developed by a 3rd party pursuant to a license or distribution agreement.

Key Fundamental Drivers

Is Increasing Competition a Credible Threat to Sales Growth?

After reporting +3.5% group sales growth in FY24, we highlight several factors supporting expectations for double-digit sales growth for in FY25. These include: i) Positive sell-in trends across all key segments in the year-to-date. (A sell-in transaction is where a retailer agrees to buy goods from a manufacturer or distributor at a discounted price), ii) New Product Development (NPD), iii) Increasing penetration into new/emerging regions and customers and iv) Improved pricing.

A key risk to sales growth over the medium term is more intense competition in the coffee category. Key global appliance peers (including SharkNinja, Whirlpool, Hamilton Beach Brands) have revealed intentions of expanding further into the category through launching espresso machines.

Whilst increasing competition has the potential to impact sales growth over the medium term, two points are worth noting. Firstly, the Company has maintained its view that the emerging competition in the coffee category is helping grow the overall market and bringing new customers to the semi-automatic category. Also, Breville’s positioning as a premium mass brand allows it to win new customers trading up to higher-quality products.

Secondly, BRG has generally weathered competitive threats well, having generated sales growth every year since FY19. The Company has outperformed the majority of its key competitors in that time. Unlike BRG, competitors reported sales declines post-Covid. The latter was largely driven by consumers returning to normal activities and spending more time outside their homes.

Implications From Potentially Higher Tariffs

In the recent trading update, the Company acknowledged that the re-election of Donald Trump as US President has increased the probability of higher (and material) tariffs on consumer goods coming out of China. BRG highlighted two actions until the tariffs: i) Continue to build inventory in the US until tariffs are enforced and ii) Continue to move 120V production out of China, as quickly as possible.

The Company is already well advanced on its plan to diversify its supply chains, by re-allocating China production to regions such as Mexico, Vietnam, and Cambodia to minimise risk from potential tariffs. This program is expected to be 80% complete at the end of calendar year 2025.

Retail price increases (estimated to be in the order of 2.5% to 5.0%) will be needed to absorb the incremental tariff. While this could have some negative volume impact, Breville’s coffee machines are a higher priced product and thus not seen as overly price sensitive. The Company has also implemented price increases in the past without significant volume impact.

Given the progress in moving production of 120V SKUs (American products) away from China, the impact to earnings is expected to be minimal. It is also worth noting that BRG has previously demonstrated its ability to quickly build inventory levels as an “insurance policy” (e.g. in response to supply chain disruptions in FY22) without losing Gross Profit Margin (GPM). This is due to the long shelf-life of its products reduces obsolescence risk.

Margin Expansion Expected

BRG reported GPM of 36.4% in FY24, up from 35.0% in FY23. GPM continues to benefit from strong pricing strategy with measured promotions as well as a more normal inventory position. The expansion in GPM was also driven by an increased focus on higher-margin sales (especially in the 1H24 period), with BRG not following competitors down the path of heavy discounting in order to stimulate sales.

The expansion in GPM in FY24 translated to higher EBIT margin, as BRG benefitted from input cost savings (from both product costs and freight). However, freight costs began to increase towards the end of FY24. While higher freight costs present a headwind for GPM in FY25, the Company has previously noted that it only ships around 3500 containers per annum (high average value per unit). As such, ocean freight is not a very large part of the cost base. Secondly, BRG has contracted rates for much of their demand with only the China-to-Europe line seeing meaningful numbers of spot containers being purchased.

In light of expectations for double-digit sales growth in FY25, the key question is whether this will translate into an EBIT growth rate that provides for operating leverage. Aside from a likely moderation in GPM expansion as freight costs become a headwind, costs are likely to step-up in FY25 as: i) Investment in marketing is expected to increase in response to competitor activity, ii) BRG continues to invest in NPD, as well as new markets and categories.

Fundamental View

The recovery in BRG shares since our recent report now sees the shares trading on a 1-year forward P/E multiple of ~34x. This multiple is broadly in line with the long-term (5-year) average but below post FY24 results release levels of ~36-37x.

Notwithstanding the recent recovery, we contend that BRG shares are a worthy investment to consider. The current multiple is undemanding in the context of an EPS growth profile of ~14% over FY24-27 on a CAGR basis. Also, BRG shares warrant a premium multiple given its track record of outperforming competition and generating consistently high earnings growth via multiple organic growth drivers.

Charting View

Breville Group shares have been trending higher for over 2 years. In late October – early November, it pulled back from its recent high to find support near $30. The last few weeks has seen it bounce off support. We also have a buy signal on the MACD. BRG should continue to trend higher from here.

 

Michael Gable is managing director of Fairmont Equities.

 

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