Choppy Waters For Endeavour

This story features ENDEAVOUR GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: EDV

Pubs remain resilient, but retail liquor faces cost of living challenges while industrial action did not help Endeavour Group’s first half.

-Endeavour Group earnings below expectations
-Retail challenged, pubs resilient
-Woolworths industrial action impacted
-Market awaits a new CEO

By Greg Peel

Liquor retailer and hotel owner Endeavour Group ((EDV)) reported a -10% fall in group earnings in the first half, impacted by cost of living pressures and the same industrial action at Victorian distribution centres that crippled former owner Woolworths Group ((WOW)) in the December quarter.

Earnings fell despite solid cost management. The company’s endeavourGO cost-out strategy provided savings of -$40m for the half, bringing cumulative savings to date of -$230m. Management continues to target more than -$290m in savings by FY26, but with -$230m already netted, Citi suggests the “easy wins” have likely now been achieved.

However, this was not enough to offset higher costs, mainly in wages and rent, in addition to some one-off restructuring expenses and costs associated with Endeavour separating from Woolworths’s IT systems (OneEndeavour). These cost increases resulted in the group earnings margin falling -90bps to 9.0%, Morgans notes, with the Retail earnings margin down -110bps to 6.7% and Hotels declining -60bps to 23.4%.

OneEndeavour is on time and on budget and enterprise planning design is currently being worked on. The shift off Woolworths’ systems will reduce costs, Morgan Stanley notes. The program will deliver simplification, which is expected to enable productivity gains.

Sacre Bleu

Retail liquor sales are generally subdued at present due to cost of living pressures. Management called out signs of down-sizing, with price hikes for French champagne driving customers into local sparkling wines. Spirit sales are in decline, partly offset by CPI-linked price increases, while beer sales are stable.

After gaining market share in the September quarter, total retail sales fell -2.7% in the December quarter and -0.8% in the first seven weeks of the second half. This compares to 1.2% and 3.8% respective growth numbers for rival Coles Group ((COL)).

Endeavour was negatively impacted by Woolworths’ industrial action with the in-stock position weighing on the first seven weeks and only being resolved now. Sales were lost due to product unavailability.

Looking forward, as the in-stock position is improved, UBS is confident the Endeavour Retail offer can return to market share gains.

Encouragingly for Morgans, management said promotional intensity, which was elevated in the September quarter, abated in the December quarter, and this has continued into the early second half.

Pubs Outperform

As Retail languished, Endeavour’s Hotels division grew first half earnings by 1%. Management noted sales momentum increased through the half, with higher sales across all key drivers of food, bars, gaming and accommodation.

Endeavour noted Hotel sales have accelerated into the second half, with 4.7% growth seen in the first seven weeks.

Gaming is resilient, with Endeavour gaining market share in Victoria as operating hours are now aligned across all competitors, while the company is benefiting, UBS notes, from high growth rates in Queensland, yet losing some share as growth is fastest in clubs and regional areas, whereas Endeavour as a pub operator is skewed to metro.

Management reiterated its intention to conduct larger-scale renewals. Longer term, this may be a key driver of earnings growth, Macquarie suggests. Endeavour notes it is on track to deliver in excess of 15% return on invested capital on its 15 renewals completed in FY24, albeit future renewals will come with capex (-$100-120m in FY26).

To fund this, capital recycling will be a key funding source. Management has called out $100m-150m of potential inflows from five hotels slated for development, while further funding may be required for future projects.

Search for a Star

While Endeavour’s search for a new CEO is “well progressed”, the board expects the start date for a new CEO to occur after Steve Donohue’s 12-month notice period expires in September 2025. As a result, Chairman Ari Mervis will be appointed as Executive Chairman and move into the role as CEO and Managing Director from 17 March 2025.

Ari Mervis will be in the role for up to 12 months while the appointment of a new CEO is finalised. While the move will provide an orderly transition to the new CEO once he/she starts, UBS believes Steve Donohue’s earlier-than-expected departure from the role is a negative overall given his intimate knowledge of the Endeavour business and his extensive experience in the Australian retail liquor industry.

With no appointment of a permanent CEO, Macquarie notes questions remain on longer-term strategy. This broker awaits further updates to come from the incoming executive chairman and the formal appointment of a new CEO. Macquarie sees two key areas of focus, being the pace of the Hotels renewal program while managing capital requirements, and plans to reverse trading headwinds in the liquor segment.

Tailwinds

UBS retains its Buy rating on Endeavour due to the strong liquor industry position, cost management, Hotels growth optionality, capital discipline, as well as valuation support.

In a brief note, Morgan Stanley retains an Overweight rating. Other brokers are more cautious. The remaining four of six brokers monitored daily by FNArena covering Endeavour all have Hold or equivalent ratings.

Morgans believes Endeavour is fundamentally a good business with well-known brands (eg, Dan Murphy’s and BWS) and number one market positions in both Retail and Hotels. Despite these qualities, the near-term sales environment remains soft, with cost inflation (including OneEndeavour costs) likely to put ongoing pressure on margins.

In addition, with a permanent CEO yet to be appointed, Morgans sees limited upside in Endeavour’s share price due to the uncertainty on future strategy.

While Endeavour trades at an undemanding multiple, Citi thinks this will remain the case until the market can gain more comfort around the company’s ability to manage medium-term margins in an industry with structural headwinds.

Citi cites the -$230m of -$290m targeted cost savings already booked, the prospect of a longer-term rent reset, potential future gaming regulatory changes, and risks around the current CEO transition, which is taking longer than anticipated, as key factors.

There is scope for a recovery in Retail given privileged assets in Dan Murphy’s, while Hotel renewals also present a sizeable opportunity, but Macquarie expects near-term trading to remain mixed and awaits a further update on strategy from the new CEO, once appointed.

Ord Minnett (Hold) has yet to update on the result. The average target among the six brokers has fallen to $4.68 from $4.84.

Find out why FNArena subscribers like the service so much: “Your Feedback (Thank You)” – Warning this story contains unashamedly positive feedback on the service provided.

FNArenais proud about its track record and past achievements: Ten Years On

Click to view our Glossary of Financial Terms