End of lockdowns raises the spirits of Dan Murphy's owner Endeavour Group

A strong second-half performance by Endeavour Group’s (ASX: EDV) hotel segment helped lift FY22 profit by 11.2 per cent to $495 million, as Australians returned to socialising in hospitality settings and discovered new drink segments.

Consequently, the Sydney-based business’ retail division, which includes Dan Murphy’s and BWS bottleshops, experienced a solid first half but endured declining sales in 2H22 as lockdown restrictions eased, creating tailwinds for the hotel trade.  

As announced today, total revenue across the Woolworths (ASX: WOW) spin-off remained relatively flat at $11.6 billion. However, EBIT from the hotel arm rose by 20.7 per cent to $315 million, buoyed by solid contributions across gaming, beverage, food and accommodation.

“These achievements were delivered against a backdrop of ongoing impacts from COVID-19, severe weather events, team shortages and a range of supply chain disruptions. Notwithstanding these challenges, the commitment and passion of our team enabled these positive financial outcomes,” Endeavour CEO Steve Donohue said.

“We delivered focussed investments in our hotels business, acquiring five new hotels and completing 40 renewals, while also improving our retail drinks network with ongoing renewals and innovative new store formats, as well as 32 net new stores.

“The investment in our digital connections with customers has been accelerated in recent years given COVID-19 restrictions, and we emerged from FY22 with both record sales and record numbers of customer connections.”

Hotels Division

Endeavour added five new hotels to its portfolio during FY22: the Terrey Hills Tavern (NSW), The Manly Hotel (QLD), the Commercial Hotel (QLD), The Empire Hotel (SA) and The Grand Tasman Hotel (SA), increasing its collection to 344.

During the year, the group experienced extensive temporary hotel closures and restrictions, posting a 6.6 per cent increase in sales to $1.5 billion. However, this represented a period of 231 trading days as opposed to 195 during FY21.

On a bubbly note, revenue during the second part of the year exceeded pre-COVID-19 levels, with the cost of doing business rate (as a percentage of sales) improving by 236 basis points to 64.2 per cent, benefiting from higher sales leverage.

Retail Division

Gross margin improved across the division during the first half of the year, underpinned by premiumisation, higher margin new products and demand for Pinnacle Drinks beverages, but was held back by increased supply chain costs and promotional activity during the second half of the year.

There was a continued rise in the sales of spirits and premix products, with the segments growing by 40 per cent over the past three years. Sales in low and zero alcohol products also accelerated, now making up five of the top ten fastest growing subcategories for the company.

The company's store network expanded by a further 32 new shops as of 26 June, resulting in a total of 258 Dan Murphy’s stores and 1,417 BWS stores across Australia.

Endeavour snapped up premium Tasmanian brand Josef Chromy Wines, best known for its Pinot Noir and Chardonnay, alongside fund manager Warakirri in April for about $55 million.

The online and digital channels continue to grow, with MyDan membership up by 15 per cent to 4.5 million active users and the BWS active base now consisting of more than 260,000 users.

FY23 Outlook

Despite the operational challenges, from a financial perspective the group was a net beneficiary of restrictions and lockdowns during the year, as elevated sales experienced in the retail division outweighed the challenges faced by the hotel division.

The business expects inflation to remain elevated, putting upward pressure on wages, cost of goods and supply chain costs and potentially dampening customers’ spending on discretionary items.

During the first seven weeks of the new financial year, it has seen a continued recovery in hotels’ trading results (up 13.4 per cent against FY20), and the trends in retail (up 12.7 per cent against FY20) are consistent with a return to normal patterns of trade.

“While we anticipate that the operating environment will remain challenging, I’m confident our team of exceptional people, our customer-focused strategy, and our disciplined approach to financial management will enable us to continue to deliver for our customers, partners, team members and shareholders,” Donohue said.

Endeavour confirmed it had acquired McLaren Vale wine producer Shingleback earlier this month, which will slot into its Paragon Wine Estates portfolio of premium wine brands which includes Oakridge and Chapel Hill.

Bruce Lawrence Mathieson, a 15.1 per cent shareholder, resigned as a non-executive of the board on 26 June and will be replaced by Bruce Mathieson Jr. - the former CEO of ALH Group, a joint venture between Woolworths Group and Bruce Mathieson Group, which now forms part of Endeavour Group.

Shares in Endeavour Group (ASX: EDV) have dropped 8.83 per cent during early morning trading, as of 11.10 AEST, to $7.54.