Endeavour Group Share Price Impacted by Strong Competition and Cost Challenges

About Endeavour Group Limited

Endeavour Group Limited (Endeavour Group, ASX: EDV) operates Australia’s largest retail drinks network under the Dan Murphy’s and BWS brands and the largest portfolio of licensed hotels in Australia. Endeavour Group was formed in 2018 through the amalgamation of ALH Hotels Group and Endeavour Drinks, before it was demerged from Woolworths and listed on the ASX in 2021. Woolworths announced the sale of their last remaining 4.1 percent of equity in Endeavour Group for $5.23 a share on 2 September 2024.

A simple business; Retail and Hotels

Endeavour Group comprises two businesses: Retail, and Hotels.

Retail operations are predominantly conducted under two store brands, being Dan Murphy’s with 275 stores and BWS with 1,453 stores. The Group also owns 6 wineries and 3 bottling facilities, as well as specialty businesses that produce and distribute exclusive brands through Pinnacle Drinks.

The Hotels segment, covering food and beverages, accommodation, entertainment and gaming operations, includes 354 hotels and managed clubs.

BWS and Dan Murphy’s generate 83 percent of sales while Hotels deliver about 17 percent of sales which includes gaming at 6.7 percent of sales with food and bars contributing 9 percent.  In terms of EBIT contribution, Retail delivers 61 percent of EBIT and Hotels 39 percent.

In FY24, Retail earned a 24.4 percent gross profit margin while Hotels earned an impressive 84.8 percent gross profit on sales.

Stable growth and consistent returns

Endeavour Group is a structurally resilient business through the economic cycle as exemplified by its consistent operating performance over the past 5 years, which included the COVID-19 pandemic.  During this 2-year period of COVID-19, Hotel sales declined markedly, while Retail sales increased significantly.

The Retail segment, because of its large operating scale, is a price leader, as measured by the product discount offered, compared to the nearest competitor. This was especially the case in FY24 when Dan Murphy’s achieved the highest ever price leadership gap to its nearest competitor. This aggressive pricing policy supports consistent sales growth from year to year and particularly appeals to the value-conscious consumer in times when the cost-of-living is elevated.

Endeavour Group is a high cash generation business with operating cash flow in FY24 at $1.2 billion, while Earnings Before Interest and Tax was $1.1 billion, representing a profit-to-cash conversion ratio of 108 percent. The Group targets a cash realisation ratio of between 90 and 110 percent.

This supports the high dividend payout ratio of between 70 to 75 percent, with the FY24 dividend payout ratio coming in at 76 percent. The Group maintains a strong balance sheet with a leverage ratio of 3.5, as measured by total debt (including lease liabilities) divided by EBITDA. The weighted average cost of debt in FY24 was 5.2 percent.

FY25 outlook steady

Early sales momentum is improving during the initial 7 weeks of trading in the first half-year of FY25, with a 0.6 percent lift in Retail sales and a 2 percent increase in Hotel sales.

Cost inflation prevailed throughout FY24, and the Group absorbed a 6.25 percent increase in award wages during the year.  In response, the Group is implementing various cost optimisation strategies aimed at saving around $290 million by FY26, of which $190 million in savings have been delivered at the end of FY24.

Endeavour Group has the scale and operating efficiency to maintain price competitiveness and EBIT margins on sales. At the same time, the Group actively manages its hotel portfolio with acquisitions and divestments as appropriate. Endeavour has a strong hotel property renewal pipeline, with a focus on larger scale renewals and redevelopments.

The Group’s operating scale advantages over competitors and the progress in unlocking asset value combined with the delivery of its FY26 cumulative cost optimisation savings target of $290 million, should ensure consistent earnings and share price accretion over the medium term.