Regulatory And Digital Forces Will Erode Liquor And Hospitality Prospects

Key Takeaways

• Evolving consumer preferences, regulatory pressures, and labor cost inflation threaten to dampen revenue growth and compress profit margins across retail and hotel operations.
  
• Heavy reliance on the Australian market and intensifying digital competition expose the company to volatility, risk, and erosion of traditional advantages.
  
• Investing in premium products, digital innovation, and hotel upgrades positions Endeavour Group for sustained growth, higher margins, and strong market resilience despite economic pressures.

Catalysts

Engages in the retail drinks and hospitality businesses in Australia.

• Changing societal preferences towards moderation and wellness, especially among younger consumers, will likely drive long-term decline in alcohol consumption per capita, translating into sustained headwinds for the retail liquor segment and reducing overall group revenue growth.
  
• Increasing regulatory scrutiny and potential escalation of ESG-related restrictions or taxes on alcohol and gaming, coupled with ongoing public and parliamentary pressures, are likely to raise compliance costs and compress net margins across both stores and hotels over the next decade.
  
• The risk of digital disruption from e-commerce incumbents and new platforms is intensifying, threatening Endeavour's traditional brick-and-mortar retail advantage and opening the door for margin pressure as price competition accelerates and online channels become increasingly efficient.
  
• The company's overreliance on the Australian market leaves it deeply exposed to domestic regulatory tightening or economic shocks, creating volatility in earnings and chronic risk of multi-year declines in key retail and hotel revenue streams.
  
• Structural cost inflation in labor, especially as ongoing shortages drive wages higher and government mandates increase workplace obligations, will continue to erode operational leverage and further weigh down net profit margins, even if topline sales stabilize.

Endeavour Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Endeavour Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Endeavour Group's revenue will grow by 2.4% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.5% today to 3.9% in 3 years time.
• The bearish analysts expect earnings to reach A$505.7 million (and earnings per share of A$0.28) by about August 2028, up from A$426.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 16.0x on those 2028 earnings, down from 16.6x today. This future PE is lower than the current PE for the AU Consumer Retailing industry at 25.1x.
• Analysts expect the number of shares outstanding to grow by 0.36% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.54%, as per the Simply Wall St company report.

Endeavour Group Future Earnings Per Share Growth

Risks

• Endeavour Group benefits from demographic tailwinds, with an aging population and rising discretionary incomes driving demand for premium beverages and hospitality experiences, which can support long-term revenue growth.
  
• The company is executing successful innovation and premiumization strategies, including expanding its Pinnacle Drinks portfolio and tapping into growing trends like luxury wines, craft beverages, and health-conscious products, which could boost gross margins and support higher earnings.
  
• Significant investment in digital platforms, omnichannel delivery, loyalty programs, and retail media is expanding customer engagement and convenience, which should drive both higher sales and improved customer retention, lifting revenue and profitability over time.
  
• The ongoing hotels renewal and property optimization programs are demonstrating strong returns, with upgraded venues experiencing sales growth over 10% above the rest of the fleet and renewed confidence in reaching targeted returns on capital employed, which may improve net margins and earnings quality.
  
• Endeavour maintains industry-leading market share, pricing power, and cash generation, giving it financial and operational flexibility to weather competitive pressures and capitalize on event-driven retail growth when macroeconomic conditions normalize, providing resilience and potential for long-term earnings growth.

Valuation

• The assumed bearish price target for Endeavour Group is A$3.6, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Endeavour Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$6.1, and the most bearish reporting a price target of just A$3.6.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be A$13.0 billion, earnings will come to A$505.7 million, and it would be trading on a PE ratio of 16.0x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$3.95, the bearish analyst price target of A$3.6 is 9.7% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.