Endeavour’s (ASX.EDV) sales and underlying NPAT for fiscal 2026 were in line with its unaudited results. Lower liquor prices helped improve sales momentum, which is extending into fiscal 2027. Operating costs are guided to step up in the short term, though, crimping profit margins. Shares dropped 5%.

Why it matters: We lower our near-term margins on higher costs. To drive sales growth, it is investing heavily in its hotels, online and data analytics capabilities, and retail media business. Its separation costs from Woolworths under the Endeavour One program are also stepping up year on year.

  • Cost reductions elsewhere only partially offset these investment costs and wage inflation. But we expect expenses to accelerate sales growth and costs to separate from Woolworths’ systems to peak in fiscal 2027. By fiscal 2030, we anticipate they will completely roll off, a material tailwind to profit margins.
  • We reduce our group pretax profit margin estimate for fiscal 2027 by 110 basis points to 4.3%, some 20 basis points below fiscal 2026 levels. We reduce our fiscal 2027 EPS and DPS estimates by 21% to $0.21 and $0.13, respectively.

The bottom line: We trim our fair value estimate for wide-moat Endeavour by 6% to $5.10 per share. While we increase our near-term operating cost and capital expenditure forecasts, our long-term estimates are largely unchanged. Shares are materially undervalued.

  • We think the market expects margins to stay at depressed fiscal 2027 levels. We forecast margins to improve by some 200 basis points by fiscal 2030, split in roughly equal parts from completing Endeavour One, transformation costs rolling off, gross margin improving, and cost reductions.

Between the lines: We anticipate the market to consolidate with smaller players exiting and Endeavour and Coles Liquor to take share. Industrywide discounting is irrational. Coles’ liquor EBIT margins have fallen to just 2%, and we think economics are even less viable for independent liquor stores.

Endeavour’s cost reductions partially offset investment costs and wage inflation

Endeavour is Australia’s preeminent omnichannel liquor retailer, operating the largest network of brick-and-mortar stores throughout the country, with more than 1,700 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 over 300 hotels, pubs, and clubs. Endeavour is one of Australia’s leading employers, with staff of some 30,000 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 of 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. About 9% of all Endeavour’s liquor sales are transacted online.

Endeavour’s revenue is highly skewed to the retail segment, which we forecast will contribute about 80% 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 60% of EBT derived through the retail business and 40% through the hotels business.

We expect consumer demand for alcohol to be relatively steady through the economic cycle, exhibiting attributes of consumer defensives. We estimate the Australian hotels market will predominantly be driven by the same factors as the off-premises retail liquor market, namely population growth and inflation. However, we anticipate a lasting trend to lower liquor consumption per capita to offset population growth and premiumization.

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 hotels segment, with its electronic gaming machines, is proving resilient during periods of consumer weakness.
  • Endeavour’s wide economic moat, strong competitive positioning, and strong balance sheet underpin top-line recovery as the industry rationalizes.

Bears Say

  • The growth of online shopping could detract from Endeavour Group’s profitability as the online sales channel has incremental costs above traditional brick-and-mortar sales.
  • Endeavour faces ESG risks through its exposure to electronic gaming machines and alcohol retailing. While gaming reforms in Victoria and NSW are incorporated in our base case valuation, material value destruction due to ESG remains a tail risk.
  • Amazon Australia’s liquor range competes in the strongly growing online channel, and irrational pricing could erode contribution margins of Endeavour’s online liquor sales.

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