Endeavour Group: Hotels rebound more than offsets Retail slump

Author name:: By Alex Lu
Job title:: Analyst
Date posted:: 17 October 2022, 12:00 PM
Sectors Covered:: Industrials

Endeavour Group's (ASX:EDV) 1Q23 sales trading update overall was slightly better than we expected.
Total group sales increased 3.1% (vs MorgansF +1.3%) with Retail down 6.2% (vs MorgansF -5.0%) and Hotels soaring 90.8% (vs MorgansF +54.0%) highlighting the natural hedge in the EDV business.
The short-term outlook remains positive with management noting strong forward bookings for Christmas in Hotels and Retail stock availability expected to be better than last year. Trading beyond Christmas however will be more unknown.
We make negligible changes to FY23-25 earnings forecasts.
Our target price remains largely unchanged at (login to view) and we maintain our Hold rating. While sales momentum remains positive, we remain cautious on margins and earnings given the elevated cost environment and ongoing strong promotional activity in the retail market.

A solid 1Q23 sales trading update

EDV’s 1Q23 sales trading update overall was slightly better than we expected. Total group sales increased 3.1% (vs MorgansF +1.3%) with Retail sales down 6.2%% (vs MorgansF -5.0%) and Hotels soaring 90.8% (vs MorgansF +54.0%).

Retail sales fade post the unwinding of restrictions

1Q23 like-for-like (LFL) sales dropped 7.5% (total sales -6.2%) as conditions normalised following elevated demand from lockdowns in NSW and VIC in the pcp. Excluding NSW and VIC, sales for the quarter were higher, suggesting underlying momentum in the liquor industry remains positive.

Interestingly, despite the changing macroeconomic environment, EDV said it is continuing to see strong consumer appetite for new, premium, low/no alcohol, craft and local products.

Online sales fell 29.5% during the quarter with penetration decreasing to 8.6% vs 11.5% in the pcp.

Given the easing of restrictions with people able to move about more freely vs last year, the result was somewhat unsurprising. Compared to pre-COVID levels (1Q20), online sales were up 50.3% (or 14.6% CAGR) with penetration 210bp higher.

Hotels bouncing back strongly

The rebound in Hotels was a key highlight with 1Q23 total sales jumping 90.8% after cycling lockdowns in the pcp where ~40% of venues were temporarily closed. Performance was strong across all key categories of Bars, Food, Gaming and Accommodation.

Bars and Food were particularly strong as more people were getting together (average booking size +10%) after years of COVID disruption.

Positive short-term outlook

No guidance was provided but management is seeing strong forward bookings for Christmas in Hotels. In Retail, EDV said it is pulling forward inventory into stores earlier this year and expects the trend towards new, premium, low/no alcohol, craft and local products to continue.

Trading beyond Christmas however will be more unknown.

Changes to earnings forecasts and investment view

We make negligible changes to FY23-25 earnings estimates.

Our PE-based target price remains largely unchanged at (login to view) and we retain our Hold rating.

Trading on 23.4x FY23F PE and 3.1% yield, we think EDV is starting to look more attractive following the recent pullback in the share price. However, the key unknown remains margins with elevated costs related to supply chain, labour and technology expected to persist in 1H23.

Management also noted promotional activity remains strong, which keeps us relatively cautious on earnings despite ongoing top-line momentum.

Risks

Key upside risks include stronger-than-expected sales growth, higher margins and value-accretive acquisitions. Key downside risks include adverse changes to liquor and gaming regulations, government-imposed lockdowns, greater competition, and increased ESG consciousness from investors.

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