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Breville Group’s headline sales number masks the positives

Breville Group’s headline sales number masks the positives

Global premium appliance brand owner Breville Group’s (ASX:BRG) recent half-yearly results released on 13 February have stirred mixed reactions among analysts and investors. There was a slight disappointment in sales, although this was overshadowed by improved gross margins and efficient cost control measures.

While the top-line figures fell short of consensus expectations in the latest six months, several key factors must be considered in understanding the company’s future prospects.

Despite the sales shortfall, gross profit (GP) increased 160 basis points, and earnings before interest and taxes (EBIT) remained largely in line with consensus estimates. This was achieved by a reduction in freight costs and controlled promotional strategies.

While short-term, top-line revenue disappointed, it’s necessary to recognise several mitigating factors, including the challenging consumer landscape, Bed Bath & Beyond’s collapse and associated progressive shuttering of 360 stores commencing in the first half of calendar 2023, and Breville’s strategy of prioritising gross profit growth over sales expansion.

Investors, of course, don’t own a business for its six-month performance or even twelve months. Breville has demonstrated an impressive five-year compound annual growth rate (CAGR) of more than 15 per cent in both sales and gross profit, suggesting a resilient business model and the presence of competitive advantages.

There is no doubt investor sentiment regarding Breville’s performance is somewhat divided. On the one hand, the company’s rational approach to promotional activity, its focus on long-term growth, and strengthening gross margins is strategically sound. On the other hand, critics suggest Breville could have reinvested some of its cost savings into promotional activities to drive better sales outcomes and mitigate any market share loss. This strategic debate underscores the importance of balancing margin expansion and market penetration.

Our view is that while it might seem prudent in the short term to engage in price promotions to help build sales volume and establish relationships with more retailers, the long-run value of relationships is greater if retailers can ultimately rely on the product’s premium status.

While much attention has been placed on sales and gross profit figures, it’s essential to highlight Breville’s improved balance sheet and cash flow performance. The reduction in inventory levels (something we have written about here at the blog in the past) from the peak in June 2023 to December 2023, along with a decline in net debt, reflects a healthier financial position. This improvement is expected to continue, with further inventory optimisation anticipated in the second half of the fiscal year. Breville’s trajectory toward achieving a net cash position by June 2024 is particularly noteworthy, as it will contribute to lowering interest costs and enhancing overall financial stability.

Despite the inevitable adjustments in sales and earnings forecasts following the half-yearly results, our long-term expectations remain positive. Remember, this company designs premium products and owns the brand. It is neither a retailer nor a manufacturer, enabling it to generate attractive returns on equity and invested capital.

In coming years, Bed Bath and Beyond cannot collapse again, and consumer sentiment will begin to improve as expectations of rate hikes give way to stability and potentially cuts. The company’s pipeline of innovative premium products will also enhance revenue generation capacity. Double-digit earnings growth over the next few years does not appear to be an unreasonable assumption.

Breville’s half-yearly report presents a nuanced picture of its performance, with sales challenges offset by gross margin improvements and prudent cost management. Divided investor sentiment provides opportunity, and the company remains held in the portfolio of the Montgomery Small Companies Fund.

The Montgomery Small Companies Fund owns shares in Breville. This blog was prepared 19 February 2024 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Breville, you should seek financial advice.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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