Breville (ASX: BRG) is an iconic Australian global consumer brand operating in the appliances market. The company has built a solid niche in the high-end appliances markets with its industrial designs and modern features.
The company has weathered tremendous disruptions over the past few years including COVID, supply chain disruptions, sales slowdowns, and macro challenges.
While the company currently faces a major threat in the form of tariffs on its manufacturing in China and a slowdown, it has shown resilience in growth and margins.
The company is now poised to bolster growth with a conducive macro environment, a recovery in China, and further opportunities coming in from changes in operations.
Table of Contents
- 1 About Breville
- 2 Great Business Model With Remarkable Resilience and Growth
- 3 Big Exposure To Macro Developments A Weakness
- 4 AI Presents Big Opportunities in Services, Efficiency, and Innovation
- 5 Relocation of Production Base Presents Threats
- 6 Breville Shares Financials
- 7 Breville Shares (ASX:BRG) Valuation
- 8 Conclusion – Ready For A New Uptrend
About Breville
Breville (ASX: BRG) is an Australian-based home appliance manufacturer, specializing in high-quality kitchen and beverage products. Their range includes toasters, ovens, coffee machines, microwaves, juicers, blenders, and commercial equipment. The company’s mainstay revenue base is its leadership in coffee equipment.
Source – Breville Investor Presentation
Breville’s design philosophy emphasizes sleek aesthetics and durable construction, with stainless steel being a prominent feature across many products. The company enjoys a strong market presence in North America, followed by Australia and New Zealand (ANZ), Europe, and other international regions.
Breville follows Apple’s model of designing and engineering products at its headquarters in Australia and manufacturing in China’s Shenzhen industrial area. Breville operates two business segments, Global Product and Distribution.
Under Global Product, the brand sells products under the Breville and Sage brands directly online and to retailers. Under the Distribution, Breville operates under a licensing or distribution agreement.
Products in the distribution segment will be sold to local partners who distribute/retail the products. Products in the distribution segment are usually where volumes are low due to the product being of a niche nature (eg. Air Fryer) or products for lower-tier sister brands where margins are slim or the market is not large for the company to prompt investment and hence ROI is low.
This distribution model has helped the company capitalize on the goodwill and brand image created by their high-quality well-designed big-ticket appliances) for low-volume products and compete in lower-tier segments efficiently.
Breville shares have a market capitalization of $5.09 billion at the time of writing.
Great Business Model With Remarkable Resilience and Growth
Breville shares (ASX: BRG) have a strong market position and enjoy stellar margins compared to competitors due to its premium focus and reputation for quality. The company’s vast portfolio of products offers high-end customers a one-stop shop for various kitchen appliances and opens opportunities for innovative services/customer experiences.
The company has weathered tremendous turbulence over the past few years through COVID and various macro/geopolitical challenges without sacrificing margins and growth.
Breville’s successful stockpiling strategy as insurance against supply chain disruptions and the onslaught of tariffs without any repercussions/write-downs again shows resilience in demand for the company’s products as gross margins have remained steady and growing.
This shows that Breville has not needed to resort to deep discounting to clear larger inventories consistently over the past few years. Post-COVID financials of major competitors all show slowdowns in growth and drops in margins due to deep discounting. Breville’s success has also helped keep brand value intact.
Over the past few years, Breville has been successful in finding new markets to drive growth despite slowdowns in previous mainstay markets such as China. The company has delivered solid growth through direct launches in Europe under its Sage brand and in South Korea.
Breville shares now has big opportunities for growth in emerging economies such as Mexico, Vietnam, India, and Cambodia, where they are also moving production to diversify from China.
Source – Breville Investor Presentation
Breville has embarked on an acquisition strategy to venture into ancillary opportunities across verticals and geographies. The company has made three major acquisitions over the past few years, namely Beanz, Chef Steps, Lelit, and Baratza.
Beanz and ChefSteps are American firms engaged in the marketing of coffee beans and augmented cooking, hence providing ancillary services to the company’s core product offerings. Lelit is an Italian producer of industrial coffee equipment while Baratza is an American producer of coffee grinders.
These acquisitions have given the company ancillary growth opportunities by leveraging the company’s existing scale, expertise, and sales platforms, hence delivering fast growth with relatively lower risk.
Source – Breville Investor Presentation
Big Exposure To Macro Developments A Weakness
A major weakness for Breville shares (ASX: BRG) is that its products are high-end and ultra-discretionary. This risk best manifests itself in the slowdown the company has witnessed in China, where the general economic downturn has reduced demand for its products and reduced the weightage of China in the company’s global revenue.
As of now, Europe, which has been one of Breville’s major growth drivers over the past couple of years, is facing a serious economic slowdown with industrial growth in major economies turning negative.
At the same time, The US Fed has signaled that rates are likely to stay higher for longer in a bid to control inflation, which will delay an uptick in consumer spending.
Hence, exposure to macro uncertainty is a serious weakness for the company due to the discretionary and premium nature of its products.
AI Presents Big Opportunities in Services, Efficiency, and Innovation
Breville (ASX: BRG) has a major opportunity in the integration of AI to improve customer experiences and drive efficiency.
The company is exploring improving customer experiences using AI as their high-end appliances are fairly complicated pieces of technology, thus opening up opportunities to leverage AI to improve various aspects of the customer experience such as troubleshooting and maintenance.
Other uses include enhancing the functionality of the company’s products using AI services such as more immersive augmented reality cooking programs/services using the company’s appliances and integration with other services such as grocery delivery providers using the company’s IoT platform.
Source – Breville Investor Presentation
Lastly, AI holds big potential to improve business process efficiency such as the generation of marketing material, increasing digital customer engagement, bringing down costs, and improving the quality of after-sales support.
Relocation of Production Base Presents Threats
While Breville shares (ASX: BRG) have big growth opportunities, it faces a major threat in the short run. The victory of Donald Trump in the recent election has enforced the case for deglobalization and sharp tariffs on goods produced in China.
This presents a major threat for Breville as cheap manufacturing in China has been a major driver of Breville’s cost competitiveness given its premium product offerings.
Donald Trump has signaled tariffs of up to 60% on Chinese manufactured goods, forcing companies like Breville to begin relocating manufacturing to other emerging economies such as Mexico, Vietnam, and the Philippines.
While this seems like a straightforward solution, it could pose serious competitive threats to the company as other countries’ ecosystems may not be able to match China’s efficiency, cost, and quality.
Breville (ASX: BRG) has delivered fabulous growth over the past few years, especially the pandemic years which provided sector tailwinds to their business.
In FY24, Breville reported revenues of A$1.53 billion (up 5.3% YoY), EBIT of A$187.5 million (up 8% YoY), and NPAT of A$118.5 million (up 7.5% YoY). Breville reported improvement in gross margins from 35% in FY23 to 36.5% in FY24 and hiked dividends by 8.2% to 33p per share.
Over the past 5 years, Breville’s growth has been delivered largely by the EMEA (Europe, Middle, East, and Africa) region which increased its share of sales from 18% to 24% at the expense of the Americas and the APAC region.
Over the year, Breville reduced inventory on hand to long-run averages of low 20’s percent from nearly 30% in the pandemic and post-pandemic years. This has freed up working capital of A$113.5 million and improved gross margins back to above 35%.
The unwinding of working capital brought the group back to a net cash position of A$53.6 million, with unused credit lines of A$190 million and cash of A$137 million. This is a very pleasant development as it gives the company financial flexibility to deal with any Trump-driven tariff plans.
Source – Breville Investor Presentation
We will be comparing Breville shares (ASX: BRG) to De’Longhi (LON: OE5M), an Italian appliance manufacturer focused on coffee appliances (which is one of Breville’s biggest segments) and LG Electronics (KRX: 066570), a Korea based electronics manufacturer that is one of the biggest appliance companies in the world.
At the time of writing –
As is evident, Breville is a more expensive stock than its peers in terms of earnings and cash flow multiples. However, qualitative aspects of the companies justify this divergence as Breville has reported consistently higher Return On Equity(RoE) and Sales Growth whilst using considerably lesser leverage.
Conclusion – Ready For A New Uptrend
While Breville (ASX: BRG) traded at a premium to peers, the company has shown remarkable execution and growth across multiple cycles and succeeded in delivering growth through avenues continuously.
Breville is currently trading at roughly 9% above its 2021 high despite having grown earnings by 31% over this period, despite massive rate hikes over this time. The current strong performance of the company combined with prospects of lower rates (higher consumer spending) and a revival of demand in China bode very well for the stock.
Overall, the company’s financials show all the traits of a high-quality consumer business which combined with great growth prospects and reasonable valuation make an attractive option for investors looking for growth at a reasonable price.
