Endeavour Group reported normalised sales growth of 1.0% for 3Q24. The retailer’s challenge is a tough industry backdrop. We expect soft sales trends to continue as the liquor retail industry undergoes a normalisation of volume and pubs experience some trading down behaviour. Even so, sales trends should improve slightly in 4Q24e and FY25e for Endeavour.

Endeavour Group reported 1H24 sales up 2.5% and EBIT up 2.6%.  The company had an increase in gross profit margins and some cost savings to help offset higher operating cost growth. Weak sales trends in liquor are likely to persist throughout 2024 in our view as the industry resets volumes back towards more normal levels post the COVID-19 boom. While higher gross margins can be a red flag, Endeavour is holding market share and the cost savings embedded in 1H24 give us confidence in second half earnings.

Endeavour Drinks Hotel Strategy Day highlighted a clear focus on efficiency at scale and refurbishment of its hotels. The business had lacked that focus under Woolworths ownership and the initiatives should lift earnings. Patience is required as the benefits will flow from FY26e onwards. The detailed financial scorecard disclosed by the company is also a big step forward in accountability. We still incorporate a risk to earnings from regulatory changes. While the exact form is not clear, on a 3-5 year horizon, there could be a hit to Hotel earnings.

Endeavour’s Hotel segment is in greater focus given recent comments from various state governments about changing regulations on poker machines. We estimate gaming accounts for 24% of group EBIT for Endeavour. Given state governments generate over $6 billion in revenue from gaming machines, we see a shift of the profit pool to government in the form of higher taxes as the key risk to Endeavour. The perception of risk about poker machines will ebb and flow depending on news headlines.

Endeavour’s strategy day investor presentations showed growth options in hotel redevelopments, store and hotel renewals, eCommerce and own label products. Pulling it together, we see the company as a 7%-9% EPS growth business. The investor day also provided a reminder that more capex will be needed to fund growth. Capex is likely to average over $400 million per annum over the next three years. We think the growth options are logical, but caution that FY23e will be low growth as the company laps elevated liquor sales.

Endeavour Group reported 3Q22 Easter-adjusted sales decline of 0.7% in its Retail liquor business and 2.5% growth in Hotels. The sales trends improved later in the quarter as the economy reopened further after a spike in Omicron cases in January 2022. The company also noted some disruptions and costs associated with floods in northern NSW and QLD.

Endeavour Group reported 1H22 EBIT of $556 million, up 3%. The result was driven by gross margin gains in the Retail business. The company also did a good job in managing costs given the disruptions from COVID-19 during 1H22. We expect most of the gross margin gains seen in recent years to be retained, particularly given the growth of Pinnacle Drinks. However, we are cautious about the performance in FY23e. Overall, we forecast FY23e EBIT growth of 4%, which comprises a 9% fall for Retail and 37% EBIT growth in Hotels.

We have a positive outlook for both revenue growth and profit margins for Coles, Metcash and Woolworths. Higher food inflation is likely to show through and offset the pressures from lower population growth and lapping COVID-19 induced sales growth. Higher inflation is not simply transitory, but has been evident since 2019. The market structure in both supermarkets and liquor add to the investment appeal. We also see a strong recovery for Endeavour Group and can make acquisitions in Hotels.