In our reporting season preview, we highlighted the consumer discretionary sector as a key area of interest.
We flagged a) the likelihood of consensus upgrades after positive read throughs in July, and b) positive investor positioning (and demanding valuations), which suggested the market had ‘priced in’ consensus earnings upgrades and indicated there could be a wide dispersion of returns across the sector during the month.
In line with our expectations, the sector has been a ‘mixed bag’ so far this reporting season. Several companies have demonstrated impressive momentum into FY25, which has been met with positive share price reactions.
Key outperformers have included Universal Store (UNI), Breville (BRG), JB-Hi-Fi (JBH), and Super Retail Group (SUL), which all demonstrated accelerating comparable sales growth in 2H24. Trading updates have also demonstrated a continuation of positive momentum in early FY25.
On the other hand, companies that have undershot the market’s heightened expectations have generally underperformed meaningfully, including fast food operators Collins Foods (CKF), Domino’s Pizza (DMP), and retailers Accent Group (AX1) and Lovisa (LOV).
The remainder of this report discusses recent updates from Focus Portfolio consumer discretionary holdings Breville (BRG), Collins Foods (CKF), and The Lottery Corporation (TLC).
Breville – Momentum Building into FY25
Breville (BRG) is held in the Focus Portfolio at a 2% weight
BRG had one of the standout results of this reporting season, as the business reported EBIT growth of +7.9% in FY24, which beat its guidance of +5.0-7.5% growth despite the volatile global consumer environment.
Global growth is accelerating
The key highlight of BRG’s result was the acceleration of top line growth in the Americas (+12% vs pcp) and EMEA (+12% vs pcp) in 2H24, which shows positive momentum heading into the company’s key trading period.
The strength of the Americas segment is particularly notable, as this represents a return to its normal cadence in the company’s most important geography (representing 55% of global product sales), where growth is being supported by:
- Market share gains – BRG has outperformed its key competitors (e.g. De’Longhi), which implies the business is continuing to gain market share in both the Americas and EMEA.
- New product releases – management has indicated the new product development pipeline will remain elevated over FY25 and FY26.
- System growth – the US espresso market is relatively immature compared to Australia, which is helping support double-digit growth in BRG’s Americas segment (along with share gains).
Interest rate cuts a near-term tailwind
Central bank interest rate cuts in the US and Europe should drive improvements in consumer sentiment, which presents a cyclical tailwind for global appliance category sales over the next twelve months. With BRG already demonstrating impressive momentum in 2H24, risks increasingly appear skewed to the upside for consensus earnings growth estimates in FY25.
Bottom line
BRG remains our preferred (and only) exposure to the retail and consumer goods sectors. We remain attracted to the company’s structural growth attributes, including ongoing market share gains in the US and Europe and its strong new product development pipeline. Despite its strong run of performance, we still see value in BRG at a forward PE of ~35x when considering the positive momentum heading into 1H25, and consensus expectations of 'mid-teen' EPS growth over the medium-term (with risks skewed to the upside).
Collins Foods – Margin Recovery Delayed
Collins Foods (CKF) is held in the Focus Portfolio at a 3% weight
Last week, CKF provided a trading update on its like-for-like (LFL) sales growth, while management lowered expectations around the trajectory of its margins in FY25. Notwithstanding the setback to our thesis, we remain confident that CKF’s margins will recover over the medium-term.
LFL sales growth has softened, but is far from disastrous
The moderation in LFL sales growth for KFC Australia and KFC Europe partly reflects the challenging comps that both segments are currently cycling, which should become progressively easier into 2H25. Despite modest declines, CKF’s LFL sales have held up reasonably well compared to the LFL sales declines experienced by other consumer discretionary companies over the last 12 months amidst cost-of-living pressures.
Margin recovery delayed due to subdued consumer environment
The key disappointment from the update was CKF’s guidance that margins would contract in 1H25, which was weaker than prior consensus expectations of broadly flat margins for FY25.
Ultimately, the subdued consumer environment has driven KFC (which controls franchisee pricing) to ramp up promotional activities, and has resulted in the deferral of further menu price increases.
Consequently, menu prices haven’t risen sufficiently to offset continued (albeit moderating) cost inflation.
While this will delay CKF’s ultimate margin recovery, it is the right decision for long-term brand health.
Bottom line
Overall, the delay in CKF's margin recovery is a cyclical, rather than structural, issue. We remain confident that CKF’s margins will recover to historical averages over time.
The timing of CKF’s margin recovery will be reliant on an improvement in the consumer environment (and hence KFC’s ability to re-commence menu price increases), which should be supported by RBA rate cuts and improvements in consumer sentiment over the medium-term.
Considering CKF’s valuation has de-rated to deeply discounted levels, the business offers highly attractive value for investors willing to look past the immediate headwinds, considering its long-term earnings growth potential remains unchanged.
| FY24a | FY25e | FY26e | FY27e | |
| Revenue | 10.4% | 4.8% | 8.7% | 9.3% |
| EBITDA | 12.0% | -1.3% | 16.8% | 14.0% |
| EPS | 14.9% | -15.6% | 42.1% | 30.5% |
Figure displays growth rates (YoY %). Source: Wilsons Advisory.
The Lottery Corp – Digital Penetration Accelerates
The Lottery Corporation (TLC) is held in the Focus Portfolio at a 3% weight
TLC’s full-year result was broadly in line with expectations, which resulted in a relatively muted market response to the update. However, beneath the surface there were trends that have reaffirmed our conviction in the company’s growth outlook over the medium and long-term.
Lotteries demonstrate their ‘through the cycle’ resilience
In FY24, the business reported revenue and EBITDA growth of +14% and +16% respectively, which was underpinned by record lottery turnover, price increases, and game innovation (changes to Weekday Windfall lotteries).
While TLC’s headline earnings were unsurprising in the context of a strong lottery cycle (including the record $200m Powerball jackpot), the result nevertheless demonstrates the resilience of lottery demand through softer consumer spending environments.
Digital penetration re-accelerates
TLC demonstrated better-than-expected momentum in its digital sales penetration, after the channel took a pause in FY23 once Covid-related restrictions were eased. This helped underpin EBITDA margin expansion, given digital sales are higher margin as they avoid the commissions that are paid to newsagents in the retail channel.
Over time, continued momentum in digital penetration will drive meaningful margin expansion, which in our view is still underappreciated by consensus estimates. Interestingly, 47% of sales of the record $200m Powerball jackpot were digital (compared to total group penetration of 41%), which suggests there are upside risks to consensus digital penetration over the coming years.
Overall, TLC’s result has given us confidence that TLC’s current run-rate of digital sales growth can continue over the medium-term, which should drive consensus upgrades over time.
Bottom line
While TLC’s near-term earnings outlook is subject to the jackpot cycle which is inherently unpredictable, our confidence in TLC’s long-term earnings potential remains unchanged. Over the long-term, we continue to expect mid-single digit revenue growth and consistent margin expansion to support high single-digit to double-digit EPS growth, which is not fully appreciated in consensus estimates.
TLC’s valuation is undemanding, with it trading on a 12 month forward dividend yield of ~4% (fully franked) and an EV/EBITDA of ~16x, which is in line with its historical average. As an ‘infrastructure-like’ company (given its long-dated monopoly licences and defensive demand profile), TLC offers attractive value on an EV/EBITDA basis relative to ASX infrastructure comps (TCL/AIA/ALX average ~23x).
Written by
Greg Burke, Analyst
Greg is an experienced analyst in the Investment Strategy team. He is the lead portfolio manager of the Wilsons Advisory Australian Equity Focus Portfolio and is responsible for the ongoing management of the Global Equity Opportunities List.
About Wilsons Advisory: Wilsons Advisory is a financial advisory firm focused on delivering strategic and investment advice for people with ambition – whether they be a private investor, corporate, fund manager or global institution. Its client-first, whole of firm approach allows Wilsons Advisory to partner with clients for the long-term and provide the wide range of financial and advisory services they may require throughout their financial future. Wilsons Advisory is staff-owned and has offices across Australia.
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