Endeavour Group brews a decent result
Earlier this year, supermarket company Woolworths (ASX: WOW) demerged and spun off its drinks and hotels business Endeavour Group (ASX: EDV), which began trading on the ASX in June 2021.
The spin-off was largely the result of pressure from anti-gambling activists, as Woolworths no longer wanted to deal with the public relations consequences of being Australia’s biggest pokie or slot machine owner.
Endeavour owns 1,643 Dan Murphy’s and BWS stores which sell and deliver beer, wine and spirits across Australia. It also owns 339 hotels (i.e. pubs) which own a total of 12,400 pokie machines. Many hotels also have accommodation facilities.
Like many spin-offs, the potential attraction of Endeavour is that it will no longer have to compete for capital within a larger corporate group. With Woolworths management in recent years concentrating on reacting to renewed competition from arch-rival supermarket chain Coles (ASX: COL), the lions’ share of Woolworths group capital has been directed towards building new Woolies, remodelling existing Woolies stores and improving the company’s distribution network.
As such, there is an opportunity for the newly-listed entity to crank up the rollout of Dan Murphy’s and BWS stores while also remodelling existing hotels and purchasing new ones. There’s also the opportunity to grow online sales by utilising Endeavour’s extensive retail network and delivery capabilities, and I suspect there are opportunities for cost efficiencies across the business too.
The major attraction of Endeavour is Dan Murphy’s, which is a category-killer that provides a wide selection of drinks to customers. With 5.5m My Dan’s members, up 20% over 2020, it has a growing advantage over the competition due to its ability to target and personalise offers to customers using the data from its membership list, while also using its buying power to obtain the best deals from suppliers and pass those savings on to customers.
Meanwhile, with hotels baron Bruce Mathieson owning 14.6% of the company, it is also well placed to continue to improve and expand its hotels business now that Endeavour is an independent company.
On to the result, which was a good one, with revenue rising 9.3%, to $11.6bn. Due to the benefits of operating leverage, EBIT rose 22.1%, from $736m to $899m.
With the pandemic encouraging people to purchase online and also utilise click-and-collect, the company’s extensive footprint of Dan Murphy’s and BWS stores allowed it to increase sales as more alcohol is consumed at home while “on-premise” locations such as pubs, clubs and restaurants remain closed during lockdowns.
As a result, online sales were up 34.7% and now represent 8.4% of total sales. Despite the pandemic increasing costs, margins increased as sales rose even faster.
The company opened 33 new retail stores and 5 new hotels while renovating 64 stores and 26 hotels during 2021. Strong operating cash flow of $1.1bn meant net debt fell 12.4% to $1,277m.
Endeavour’s largest segment saw same store sales rise 8.6%, making the two-year average 8.2%. Overall, retail sales rose 9.6% to $10,178m, with the company continuing to expand its own brand Pinnacle Drinks offering with more than 530 new products released.
Helped by the continuing trend towards premiumization, especially in craft beer, champagne and gin as well as no alcohol and low alcohol alternatives, as well as more own brand sales, EBIT margin rose from 6.1% to 6.6%. The trends towards spirits also continued, with spirit sales rising 20% and showing similar growth to 2020.
The company noted that retail sales began to normalize once pubs, clubs and restaurants opened as customers preferred to drink with friends rather than at home. However, with its digital offering utilising its extensive network to provide convenient purchase and pick-up or delivery options, management also noted that the shift to digital was sustained even as restrictions eased.
It was a tougher year in Endeavour’s Hotels business, however. The group had 169 days in which one or more hotels were closed due to COVID, with Victoria and Queensland the most affected.
Management has taken the opportunity to reset the cost base and also renew its gaming fleet. 500 new pokies were added along with the installation of cashless ticket in, ticket out technology in South Australia and Victoria, and contactless ordering and paying through me&u across its network.
As restrictions eased, patrons returned quickly to its hotels. As 2020 was also severely affected by lockdowns, sales in 2021 did improve though, up 7.3%. With high variable costs and the increase in sales better covering fixed costs, EBIT margin also improved, up from 13.3% to 18.4%.
Even so, the Hotels business has experienced a two-year sales decline of 13.6%, although this should improve once vaccinations are fully rolled out across Australia and its hotels reopen.
Due to the ongoing lockdowns on the east coast, 41% of its hotels remain closed. Along with its retail business cycling a strong comparable period in 2021, total sales are down 2.3% on 2021 but up 11.1% on 2020.