Breville Warns On ‘Challenging’ Outlook

By Glenn Dyer | More Articles by Glenn Dyer

Breville (BRG) shares slumped 8% to a two-month low yesterday after directors and management said the current financial year would be “challenging”.

The company told the ASX yesterday that net profit rose 7.5% to $50.2 million in the year to June, with revenues up 9.4% at $576.6 million.

Breville will pay a final dividend of 14 cents a share, up from 13 cents a year ago, making a full year total of 28.5% up 5.6%.

But as good as they figures were, the market didn’t like them first up and down went the shares by around 8% – all it seems because of the use of the word ‘challenging’.

CEO Jim Clayton used the world in a comment in yesterday’s profit statement, while directors said in their outlook statement:

“The 2017 financial year is expected to be challenging as the Group progresses through the execution of its transformation plan and anticipates global business conditions to be increasingly challenging and competitive."

"With a strong balance sheet, an increasing international presence, and continuing along its strategic transformation, the Group remains well placed to take advantage of future opportunities.

A more considered examination of the result, especially the improved performance in North America, and up went the shares in afternoon trading and they ended down less than 1% at $7.89.

There’s nothing like a bit of time to re-examine initial reactions to bring about a reassessment of a situation.

Thanks to double-digit revenue growth in North America, driven by the popularity of espresso coffee machines, mini ovens and toasters, meant a 37% jump in earnings before interest and tax and more than offset a weak performance in Australia and New Zealand.

In fact, Breville’s sales in North America are now larger than revenue struck in its home market of Australia and New Zealand (ANZ).

Breville chief executive Jim Clayton said despite the “challenging nature of the global market", the company was able to deliver in line with its expectations, while also making progress on its transformation program.

The higher dividend cheque from Breville will please retail billionaire Solomon Lew, whose Premier Investments owns nearly 33% of Breville.

The 1% fall in ANZ full-year revenues to $242.6 million came as the company’s home region faces market challenges in the mid-market segment.

Revenues for the year of $242.6m for the ANZ regions, were marginally lower ($2.5m or 1.0%) than the pcp (FY15: $245.1m), directors said yesterday.

"In line with prior reporting periods, ANZ revenues from the Breville designed and developed products have continued to increase, being 11.2% higher than the pcp. The remaining revenues from ‘sourced products’ (internally referred to as ‘Breville Local’), which account for a greater proportion of total revenue, have declined given the competitive nature of this segment of the market. The price-driven nature of this segment, coupled with discount retailers favouring their own home brands in the entry to mid-price points, contributed to the decline in the revenue of this market segment.

"EBIT for the year decreased to $16.6m (FY15: $18.3m), with the overall EBIT margin decreasing from 7.5% in the prior year to 6.9%. EBIT for the second half of the year clawed back some of the shortfall reported in the first half by increasing to $5.3m from $2.1m in the pcp.” Looking at the US it was a different story.

Breville said its North American business "has continued its strong growth with reported revenue for the financial year increasing to $251.8m (FY15: $203.1m) or by 24.0% compared to the pcp. In constant currency, revenues for this segment increased by 10.3%, reflecting the ongoing positive growth since the juicing category re-set, which commenced in calendar year 2014.

"Increased North American revenues were underpinned by new product releases as well as the sustained performance of the existing product range in the key categories of beverage and cooking. Core products in these categories include the range of espresso machines, mini ovens, toasters and kettles.

"Reported EBIT for the year was 36.9% higher than pcp increasing to $43.6m (FY15: $31.9m) driven by the increase in revenue along with a more favourable product mix. The segment EBIT margin, which increased to 17.3% (FY15: 15.7%), was also assisted by the introduction of new innovative products at higher margins.”

Revenue in the Rest of World distribution business "was negatively impacted by a number of our distribution partners’ markets being exposed to the effects of a strengthening USD, as well as specific issues affecting some of the markets in which our partners operate.”

"The UK business has continued its solid performance with revenue in AUD growing by 15.2%. This increase has resulted from both an expanded customer base as well as a wider product range.

"Reported EBIT of $22.1m (FY15: $20.3m) was 8.4% higher than pcp. The segment EBIT margin improved to 26.8% from 25.8% in the prior financial year, driven by a positive shift to higher margin products in both the Rest of World distribution business and the UK,” Breville directors said yesterday.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →