Endeavour Group reaps higher profits from people going out again, lifting earnings at its bottle shops, pubs

Despite strong profit growth, Endeavour shares drop 12 per cent as investors fret over slowing bottle shop sales since July.

Endeavour Group, which owns Dan Murphy’s, BWS and a network of pubs, is toasting the return to social connections formed over a glass of beer at the local bar, but has had its annual results partly spoiled by thinning profit margins at its bottle shops.

Shares in Endeavour sank 12 per cent after its latest full-year results were issued, making it the worst ASX 200 performer on Tuesday, as profits undershot expectations and analysts raised concerns bottle shop sales were slowing more than expected.

Adding some extra pain to the performance and outlook was escalating costs coming out of its portfolio of 258 Dan Murphy’s and 1417 BWS convenience stores in the June half as higher supply chain costs - from sourcing pallets to fuel and drivers for its deliveries - diluted profit growth.

Analysts were preparing for earnings revisions for Endeavour this year as trading volatility and a lift in the intensity of competition in the liquor store sector had made Dan Murphy’s possibly more reliant on discounting and promotions to keep faith with its ‘lower price guarantee’ pledge.

Endeavour sank 12.3 per cent as investors digested the full-year results – flat revenue of $11.59bn for 2022 and an 11.2 per cent rise in net profit to $495m – closing down $1.02 at $7.25.

While its retail liquor stores might have underwhelmed investors, there was plenty to cheer at the pubs and hotels arm of the business as customers flooded back as health restrictions ended and fears of outbreak faded.

Spun off from Woolworths and floated on the ASX in June last year, Endeavour has had a mixed run through the pandemic. Dan Murphy’s and BWS stores were kept open through lockdowns but its pubs were not. This triggered a surge in bottle shops sales but left pubs shuttered.

Now Endeavour is witnessing a return to normal patterns of socialising to push a rebound in sales at pubs and hotels and bring turnover at bottle shops back down to historic levels.

A trading update revealed retail sales at its bottle shops had fallen 6.7 per cent year on year over the seven weeks from July 1, while hotel trading was 75 per cent up for the same period.

Meanwhile, Endeavour said earnings from its bottle shops slipped 0.4 per cent to $666m in 2022 with earnings margins thinned in the second half and as much as 100 basis points below analyst expectations. Higher supply chain costs were partly blamed for the slimmer profits, as Dan Murphy’s and BWS paid higher prices for pallets, drivers and invested more in technology.

“We are talking about fuel costs, transport costs and a variety of other impacts. I think what we have demonstrated in 2022 is the capacity to manage those costs throughout the course of the year ... we are well prepared to deal with the same sort of volatility going into fiscal 2023 as we have lived through in the last couple of years,” said Endeavour chief executive Steve Donohue.

“We have a reasonable track record actually demonstrating the capacity to do that.

“It is hard to know precisely what‘s going to happen given the amount of volatility but we are very focused on remaining agile.

“The big picture though, and is important to bear in mind, is that continued positive return to socialisation, the premiumisation trend continue in terms of craft (drinks) … and all those sorts of themes. We are not seeing any real shift in that.”

Any disappointment with its liquor stores was countered by its hotels and pubs which generated earnings of $315m, up nearly 21 per cent, as that getting together with family and friends at the local pub helped boost returns.

“Australians are returning to socialising in hospitality settings, and the trend towards discovering new drinks is continuing,” Mr Donohue said.

“The nice thing is actually pubs just feel great again that that idea of social connection is a really important part of Australian society and the public place to do it, and getting team members back to the pub, getting customers back to the pub has got everybody’s spirits up and I think that’s what is getting through.”

Mr Donohue said during 2022 Endeavour delivered focused investments in its hotels business, acquiring five new hotels and completing 40 renewals, while also improving its retail drinks network with ongoing renewals and innovative new store formats, as well as 32 net new stores.

During the year, Endeavour increased its digital investment to improve its online offering, which supported online sales growth of 17 per cent to $1bn, with online penetration reaching 10 per cent, 152 basis points higher than 2021.

Endeavour told investors it will pay a final dividend of 7.7c a share on September 16.

Originally published as Endeavour Group reaps higher profits from people going out again, lifting earnings at its bottle shops, pubs