Endeavour’s (ASX: EDV) liquor sales momentum is improving. In the December 2025 quarter, sales were up 2% year on year. Sales had declined year on year in both the September quarter and in fiscal year 2025. However, sales are driven by heavy discounting, which is cutting into liquor profit margins.

Why it matters: Bolstering the value proposition comes at a cost. In the first half, liquor gross profit margins declined by 85 basis points. Liquor EBIT is expected to be down 12% on the prior year. In the smaller hotels segment, first-half growth was solid at 4%, with flat profit margins.

  • The market shrugged off the expected decline in group pretax profits of about 7%, with shares largely unmoved. However, the significant drop in liquor margins surprised us. Further, Endeavour estimates the overall liquor retail market shrank in the December half compared with last year.
  • We cut our fiscal 2025 EPS estimate by 15% to $0.23. This still assumes a more rational liquor market in the second half and gross margins rebounding. More importantly, soft liquor demand, despite strong Australian retailing growth, prompts us to taper our long-term sales growth forecasts.

The bottom line: We reduce our fair value estimate for Endeavour by 11% to $5.40 due to a weaker long-term outlook on liquor consumption and the flow-on margin impact. However, the group’s relative competitive advantage is unaffected, and we maintain our wide moat rating.

  • In the long term, liquor demand is defensive. But we recognize that younger cohorts, Generation Z and millennials, are moderating their liquor consumption. We now expect changing drinking behaviors to fully offset population growth and positive mix-shift to premium products.
  • Shares are materially undervalued. The market is expecting structurally lower long-term margins. For our valuation to equal current prices, group EBIT margins need to drop 80 basis points to 7.0% permanently. We expect them to rebound to 8%-plus by fiscal 2028.

Endeavour’s liquor profit margins to recover as costs and discounting ease

Endeavour is Australia’s pre-eminent omnichannel liquor retailer, operating the largest network of brick-and-mortar stores throughout the country, with more than 1,700 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 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 will underpin a maintainable and steadily growing dividend.

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 ranging competes in the strongly growing online channel and irrational pricing could erode contribution margins of Endeavour’s online liquor sales.

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Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

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Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.