Breville Marked Up For Growth

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-Good US expansion opportunities
-Well placed in Oz despite sluggish retailing
-UK market now on the boil
 

By Eva Brocklehurst

Small appliance distributor and manufacturer, Breville Group ((BRG)) boasts a firm local presence and strong sales growth in North America. The stock has been caught up in the subdued outlook for retailers but its position in a key growth area and expansion opportunities mark it for attention. It has certainly been noticed by JP Morgan, which initiated coverage with an Overweight rating.

Last time FNArena looked at the stock, back in March, the company confirmed the Keurig distribution agreement in Canada would end. This will occur at the end of this month. The news of the Keurig loss was brushed aside but several brokers were a little cautious about the Australian manufacturer of appliances, given the weak consumer sentiment and retail sales. CIMB retained an Outperform rating at the time because the stock offered ongoing growth and market penetration and the Keurig announcement just took away uncertainty. Macquarie, too, did not expect a long-term impact from the cessation of Keurig and also retained an Outperform rating, observing that Breville's own brands were better quality anyway.

Since then, there's been no evidence the company has faltered. Brokers cite strong growth in underlying earnings, favourable international prospects and a healthy balance sheet. These positive elements continue to battle against the wishy washy Australian retailing scene and the general expectations for a softer economy.

Those positive on the stock emphasise the potential that comes from the large US and UK markets. JP Morgan currently forecasts 3% sales growth in Australia and 7% sales growth in the US for Breville but thinks these forecasts could still be conservative. FY12 earnings were broken down into Australia (28%), North America (48%), New Zealand (5%) and other international (19%).

The company has two main brands. Breville is the premium brand and Kambrook the discount brand. This is one of the drivers of success, in JP Morgan's view. Breville's share of small cooking appliances sales is 29%, across all brands, with the Breville brand alone accounting for 17%. The company has been affected by the rise of house brands, such as Abode by Woolworths ((WOW)), Homemaker by Kmart ((WES)) and Expressi by Aldi. These have turned major customers into major competitors.

House brands increased market share to 25% in 2012 from 14% in 2009. After an initial dip following the home brand onslaught, Breville has been able to recover its market share via the dual brand strategy. This is a position of strength. JP Morgan observes the macroeconomic environment has customers either trading down to entry level brands or trading up to premium brands and Breville benefits either way.

The domestic market is relatively mature but the market for small domestic appliances is one of the more robust of the retailing sector. JP Morgan cites a report that shows sales increased 7.7% in the March quarter for small appliances versus just 2.1% for total discretionary retail sales, excluding food and cafes. The broker also notes the likes of JB Hi-Fi ((JBH)) has expanded its ranges of small appliances and that takes in the Breville product. Home improvement retailer, Masters, also intends to expand its footprint and this could, potentially, expand Breville's business. 

Breville also invests heavily in product innovation and marketing. The launch of the co-branded Nespresso machines is testament to this. Nespresso has 6.5% market share, having risen from 1.7% in 2009. Another driver of success is North America, where Breville has a market share of around 10%. The first half revealed North American core product sales were up 30%. Breville also achieves higher earnings margins in the US compared with Australia, because of the premium product.

Stores are also expanding within the existing US retailer customer base. Breville products are not stocked in all stores so one of the channels for growth is increasing the number of existing stores to which the company distributes. The existing retailers have strong growth plans. Bed, Bath and Beyond and Williams Sonoma posted 10-year compounded annual sales growth of 10% and 6% respectively. Amazon.com experienced 32% growth, admittedly over a wide range of categories. They're all expanding and that's the important theme for Breville.

Then there's the UK. This new market is worth $1.7 billion in the domestic appliances business. Breville has launched there with 16 flagship products called Sage by Heston Blumenthal, and the celebrity chef has endorsed the product. Distribution is through high-end specialty retailers such as Harrods, Selfridges, Debenhams and House of Fraser. Okay, there are risks. Breville is attempting to build a new brand from scratch. Nevertheless, JP Morgan is confident the endorsement of Heston Blumenthal could emulate the success of Jamie Oliver's relationship with Tefal. The launch is too new for sales details, thus the revenue is not factored into valuations.

On the FNArena database the consensus target price at $6.75 is suggesting 6.8% downside to the last share price. The target price has risen over the last week, from $6.47. The dividend yield is 3.7% for FY13 consensus earnings forecasts. Of the five brokers covering the stock on the database four have Buy ratings and one has Neutral (Credit Suisse). The range of targets is $6.00 (Macquarie) to $7.90 (JP Morgan).

Of those covering the stock, UBS produced a recent review. The broker upgraded the target to $7.70 in May from $6.30, as the company prepared for its UK launch. Success is expected but it's early days. The stock may not be cheap but UBS also thinks it is worth the price. Again, this is because of the strong potential in the US and UK markets. 

In Australia, BRG has five brands including Breville, Kambrook, Philips, Goldair and Ronson but concentrates on the first two. The international distributors business is headquartered in Hong Kong and sells products through 25 distributors globally. Breville sells products in Asia through a network of wholesalers who sell to retailers under the Breville brand, and a generic non-branded product to Original Equipment Manufacturers (OEMs) in Europe which brand the product as their own.
 

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