Business Strategy & Outlook
Endeavour is Australia’s pre-eminent omnichannel liquor retailer, operating the largest network of brick-and mortar stores throughout the country, with more than 1,600 liquor outlets across the well-known Dan Murphy’s and BWS brands. Endeavour also has substantial interests in hotels and electronic gaming machines, operating more than 12,000 gaming machines across its portfolio of more than 300 hotels, pubs, and clubs. Endeavour is one of Australia’s leading employers, with staff of more than 28,000 throughout Australia. Endeavour’s business is divided into two segments. Its retail segment is Australia’s leading omnichannel liquor retailer, while its hotels segment provides hospitality services and gambling operations. Endeavour’s retail segment is also vertically integrated, supported by Pinnacle Drinks private-label portfolio, which operates several wineries, as well as bottling and packaging facilities. Products produced are supplied exclusively to Dan Murphy’s, BWS, and ALH Group in Australia and provide a source high-margin differentiation while also minimizing supply chain risks in the wine category.
Shifting consumer trends toward online shopping and convenience have led to strategic investments in online shopping platforms and delivery capabilities, such as smartphone applications for each brand and online pure play retailers Jimmy Brings and Shorty’s Liquor. Almost 9% of all Endeavour’s liquor sales are transacted online. Endeavour’s revenue is highly skewed to the retail segment, which will contribute approximately 85% of revenue over the next decade, with the balance coming from the hotels segment. The split is more evenly balanced at an EBT level due to the higher margins achieved in the hotels business, with approximately 65% of EBT derived through the retail business and 35% through the hotels business. The consumer demand for alcohol is to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. The Australian hotels market will predominantly be driven by the same factors as the off-premises retail liquor market, namely population growth and inflation.
Financial Strengths
Endeavour Group is in reasonable financial shape. Endeavour’s leverage ratio, measured as net debt/EBITDA, including lease liabilities, was approximately 3.5 at the end of June 2022. Endeavour Group’s strong market positioning and wide economic moat provide us with confidence that current gearing levels are maintainable. There’s an interest coverage—defined as reported EBITDA/interest expense—of approximately 6 times at fiscal 2023 year-end. There might not be any material increase in the level of gearing as consistent with the investment-grade credit profile Endeavour is targeting.
Bulls Say
- Endeavour’s dominant retail market share of about 50% is multiples of its closest competitor and provides a source of long-term maintainable cost advantage.
- Endeavour’s partnership agreements with Woolworths allow the business to leverage the scale and capabilities of Australia’s largest supermarket.
- Endeavour’s wide economic moat, strong competitive positioning and strong balance sheet will underpin a maintainable and steadily growing dividend.
Company Description
An investment in wide-moat-rated Endeavour Group provides investors with exposure to one of the most well entrenched dividend-paying businesses in the Australian retail landscape. Following decades of enduring organic growth through store rollouts, Endeavour’s off-premises retail segment—with more than 1,600 retail outlets mainly across its Dan Murphy’s and BWS brands—accounts for approximately half of all off-premises retail liquor sales within Australia. Endeavour’s immense scale in the off-premises retail segment is unrivaled within Australia. Indeed, Endeavour’s sales are almost three times larger than its nearest retail competitor, Coles.
(Source: Morningstar)
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