Breville Takes On Trump’s Tariffs

This story features BREVILLE GROUP LIMITED. For more info SHARE ANALYSIS: BRG

Breville is already responding to impending tariffs on goods manufactured in China for import into the US under the Trump administration, to get ahead of the game.

-Breville Group’s first half sales continue positive trends
-US inventory build-up ahead of tariffs
-Manufacturing already being moved out of China
-Competition risk rising

By Greg Peel

Faster than you can make a ham and cheese toastie, Breville Group ((BRG)), which these days thrives on its coffee-makers ahead of its traditional toastie-makers and other kitchen appliances, has responded to Trump’s re-election. Breville manufactures its products in China, and generates 55% of its revenue in the US.

Trump has constantly threatened to place tariffs on all imported products into the US of 10% (or maybe 20%) and 60% (or maybe more) on products manufactured in China. The level varied during his many rambling rally speeches, but on the other hand, it is assumed there must be at least some sensible people in MAGA Land that will point out the implications of such a policy, and affect some sort of reining in. Perhaps only 30% for China, for example.

As for appreciating the tariff-inflation relationship, well that’s another story.

While the final policy will not be known before the Trump administration kicks off in January, global companies have already been responding on the assumption of some sort of tariff headwind. China is the manufacturing centre of the world for an enormous amount of foreign companies. One response is to start easing up selling prices (in some cases even before Trump’s victory was decided) to abrogate the pain of a potentially large price jump ahead.

Management at Breville has also flagged responses of its own.

Trading Update

The tariff warning was included in Breville’s September quarter update, which revealed the sales strength the company enjoyed in the second half of FY24 has continued into the first half of FY25, with group sales up 12%.

In the period to date, all three “theatres”, being the US, Asia-Pacific and Europe, are performing as expected. Asia-Pacific sales slipped in the first half, but have now turned positive. Logistics costs have picked up but have largely been offset by reductions in freight costs, affecting a neutral impact on gross margin. The distribution segment is continuing to grow gross profit.

On the whole, said management, business is performing “between the goalposts”, implying within Breville’s FY25 planning parameters.

But then there’s the tariff risk.

In order to get ahead of the game, Breville plans to build inventory unabated in the US in order to maintain pricing levels post tariff introduction, at least for a while. RBC Capital suggests inventory build will be a negative insofar as it would increase Breville’s working capital intensity. However, Breville’s demonstrated ability to manage through elevated covid inventory levels in recent years should give investors some comfort this time around.

The second response is to move 120 volt production (US) out of China, a process the company had already begun. A re-allocation to the likes of Mexico, Vietnam and Cambodia will reduce tariff risk (in terms of size of tariff).

This project started two years ago, Morgan Stanley notes, with the first incremental production going live around March next year. The project is expected to be some 80% complete by the end of 2025. RBC Capital does see some risks a shift of production out of China may result in impacts to one or both of gross margin or product quality.

Breville is known for its quality products. While its coffee-maker penetration is smaller than the big names of Nespresso, DeLonghi, Whirlpool and Electrolux, Breville has consistently grown sales post-covid when its competitors have flatlined or gone backwards.

Goldman Sachs understands Breville’s coffee machines and most other kitchen appliances (oven, microwave, toaster etc) are covered within List 4 of the Section 301 tariffs, which is currently taxed at 0-7.5% and may increase to 5-17.5%, i.e. an incremental 5-10% tariff to be levied on the importer. Assuming the import value is around 50% of the final retail price, Goldman would expect retail prices will need to be increased by 2.5%-5% to digest the incremental tariff.

While this could have some negative volume impact, Goldman does not see coffee-makers as highly price sensitive products (Breville has implemented price increases in the past without significant volume impact). Against other industry peers who may also be facing similar inflationary pressures, the broker does not at this stage see this as a material impact, though would need to further clarify with management.

Everyone will be in the same boat, of course, including Breville’s competitors. The vast majority of small household appliances are produced in China, Ord Minnett notes, so competitors will have to contend with the same issue of increasing costs. In the very near term, there is a likelihood demand for consumer products in the US will rise as consumers prepare for price increases.

Competition

Speaking of competition, brokers see an increase as another risk for Breville along with tariffs. While Citi acknowledges Breville has multiple organic growth drivers (new product development, geographic expansion, ongoing coffee market tailwinds) and its asset-light model is attractive in a soft consumer backdrop, Citi thinks the market may be under-appreciating the risk around rising competition in the coffee category.

Competitor entrants in coffee (SharkNinja, Whirlpool’s KitchenAid, Philips entering Europe) will help grow the market, Petra Capital believes, and Breville did well in countering DeLonghi’s recent marketing push, but it will raise medium and long-term competitive risks and thus will cap Breville’s upper PE trading range.

Petra further points out Breville will be cycling stronger sales comparables in the second half FY25 amid elevated global macro risks.

Valuation

Among brokers monitored daily by FNArena, Macquarie (Outperform), Morgans (Hold) and UBS (downgrade to Neutral from Buy) have not updated in response to Breville’s trading update.

Morgan Stanley retains an Overweight rating, viewing earnings risks from tariffs as more of a one-off and temporary in nature.

Noting tariff risk is the same for everyone, and the likelihood of increased US sales ahead of tariff introduction, Ord Minnett retains an Accumulate rating.

Further to Citi’s warning regarding new competition, this broker also suggests the stock appears expensive, even when adjusting for growth, although a premium relative to peers may be warranted given the company’s consistent execution. For Citi to turn more positive than its current Neutral rating, the broker would need to hear from the company around the timing of new direct market entries.

That leaves three Buy or equivalent, and three Hold ratings among the aforementioned brokers, with a consensus target price of $33.73.

Given Goldman Sachs does not see a material impact from tariffs at this stage, this broker is sticking with Buy and a target of $34.20.

Breville is a global leader, notes Jarden, with a growing addressable market and proven record, and is well positioned to deliver comparatively de-risked double-digit earnings growth on a five year-plus timeline. In Jarden’s view, this warrants a premium multiple given brand resilience and the market not appropriately reflecting the Asian opportunity (growing scale in South Korea, expanding into Japan and China).

The above, coupled with an improving macro backdrop and green shoots in all “theatres”, should see Breville’s top-line accelerate into FY25, Jarden suggests. Coupled with a kick from the covid replacement cycle, consensus sales risk should remain skewed to the upside.

The above said, at a 33x PE, Jarden believes this is reflected in the multiple and retains a Neutral rating with a low-end $26.30 target.

RBC Capital has a Sector Perform rating and a $27.00 target.

Petra Capital has made no material earnings forecast changes and has an unchanged target of $28.30. While from the bottom-up, Petra views Breville as a high quality business, top-down headwinds have increased which the broker expects will de-rate the stock off its elevated valuation. On a 12-month horizon, Petra retains its Sell rating.

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