Breville Group: FY22 Earnings - A deliberate choice

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

24 August 2022, 8:30 AM

Sectors Covered:

Gaming and Retail

• Breville Group (ASX:BRG) achieved 15% growth in EBIT in FY22, in line with its guidance and our forecast. Sales rose 19% and each region achieved constant currency revenue growth in the range of 15-20%. But this wasn’t what caught the attention of the market. What did get the headlines was the doubling of BRG’s year-end inventory balance to $446m (MorgansF: $318m) as a ‘deliberate choice to mitigate against supply chain disruption and ensure there are enough coffee machines and pizza ovens to meet the demand the company anticipates in 1H23.
• We haven’t changed our earnings estimates significantly. We continue to expect BRG to deliver high single-digit sales growth in FY23, outperforming the market, and to do so while holding gross margins. Our EBIT estimates for FY23 and FY24 increase by a little under 1% to $170m and $187m respectively.
• We retain an ADD rating with a (login to view) target price.

Event

▪ FY22 earnings.

Analysis

Sales growth continued to outperform the market. FY22 was a challenging year for the home appliances sector, but BRG outperformed the market with 19% growth in sales.

In constant currency terms, sales growth was between 15% and 20% in each of BRG’s three regions, with the strongest growth in the Americas (+19%) as BRG’s capitalised on its improved inventory position.

EMEA was softer (+15%) after a rollercoaster that saw it grow sales by 38% in 1H22, followed by a decline of 16% in 2H22 as consumer spending pulled back and retailers destocked. Demand remained robust in APAC with 18% constant currency sales growth.

We’d expected a higher inventory number, but not that much higher. BRG had done a good job of explaining its plans to increase its inventory balance at June 2022, effectively bringing forward some of the seasonal peak in stocks that would, in a normal year (supposing such a thing exists) fall in September.

The inventory balance was $446m, more than double the amount at June 2021 ($217m), and 40% higher than our estimate of $318m.

The inventory build was, in BRG’s words, a ‘deliberate choice’ to ensure demand is sufficiently covered in 1H23 and to avoid the risk of losing sales due to supply chain disruption.

Given we forecast COGS in 1H23 of $639m, we found BRG’s arguments convincing, especially in light of the non-perishability and non-seasonality of its range. BRG’s CEO Jim Clayton pointed out its inventory positions are not correlated with gross margins.

Gross margins well controlled. The gross profit margin was 34.3%, down just 50 bp on FY21 and in line with our forecast. BRG has managed to offset inflation in the raw materials and freights costs that go into COGS through price increases.

We anticipate a similar pattern in FY23 and forecast a gross margin of 34.6%, up 30 bp on FY22.

Forecast and valuation update

No material changes to estimates. We have made only minor changes to our estimates, taking revenue up by 1% in FY23 and FY24 and EBITDA up by 2% in both years.

We have increased our depreciation and amortisation forecasts, offsetting the 2% higher EBITDA forecasts to leave our EBIT estimates effectively unchanged at $169.7m in FY23 and $186.6m in FY24. Higher financing costs weigh on our NPAT forecasts, which we reduce by 4% in FY23 and 2% in FY24. 

Target price is unchanged. Our target price, which is the average of our DCF and EV/EBIT-based valuations, rounded to the nearest dollar, remains (login to view).

Investment view

In our opinion, BRG deserves to trade at a premium multiple. It is positioned to deliver double-digit sales growth consistently over the next few years as it grows its market share, notably in geographies into which it has recently launched.

While we expected an inventory build in FY22 much lower than what was delivered, we expect this to moderate in the future, leading to an improvement in free cash flow generation. Our rating remains ADD.

Risks

The key risks are around further retailer destocking, a loss of pricing power or a failure to draw down on elevated inventory positions.

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