Breville fell 6%, but Airlie sees a much bigger opportunity brewing

Breville Group (ASX: BRG) delivered record revenue in FY26, held margins remarkably steady through tariffs and inflation, and saw some of its youngest international markets grow more than 70%.

Investors weren't impressed, sending the shares down around 6% in afternoon trading.

But Airlie Funds Management's Ray David thinks the result showed exactly why Breville has been able to command a premium valuation.

"The number one metric that everyone should be focusing on with Breville is revenue growth. Just given Breville's standalone headline multiple is high – it's 30 times earnings – to sustain that multiple you've got to deliver consistent growth."

Airlie has significant indirect exposure to Breville through Premier Investments (ASX: PMV), which owns around 25% of the company. And David believes the investment case goes well beyond another year of selling more coffee machines.

Despite a cost-of-living squeeze, intensifying competition and a difficult consumer backdrop, he sees Breville's coffee business proving surprisingly defensive - while an enormous international opportunity could provide its next leg of growth.

I spoke to David about the result, why the cost-of-living crisis could actually be helping Breville, and the growth story he thinks the market may be missing.

Breville's FY26 results

• Revenue rose 6.7% to a record $1.8 billion, around 2% below expectations, with reported growth dampened by second-half US dollar and euro weakness.
• Global Segment constant currency revenue grew 9.7%, with double-digit growth in the second half.
• EBIT came in at $207 million, in line with expectations, budget and prior guidance.
• Second-half gross margin reached 36.8%, above both the first half and prior corresponding period.
• Final dividend of 19 cents per share, fully franked, took full-year dividends to 38 cents, up 2.7%.
• Net cash finished the year at $104.4 million.
• Manufacturing diversification is substantially complete, with 85% of 120-volt product gross profit dollars now sourced outside China.
• China, Korea, Mexico and the Middle East collectively grew more than 70%, with Breville's China team delivering 7.1 times the revenue of its previous distributor.

What was your biggest takeaway from Breville's result?

The number one metric that everyone should be focusing on with Breville is revenue growth.

Just given Breville's standalone headline multiple is high – it's 30 times earnings – to sustain that multiple you've got to deliver consistent growth.

They delivered basically low double-digit revenue growth, which we think is a good outcome in an environment that's very challenging.

You've had an energy crisis, cost-of-living crisis and inflation outbreak, and yet they've delivered double-digit revenue. What that shows us is their coffee category is resilient and growing.

They've called out double-digit revenue growth across coffee and particularly in the Americas, which has been a tough environment.

The second thing is some of the new product development. The Breville Oracle, which is a machine that's over $2,000, is selling very well into the market.

And the other thing that stuck out for us was their new market expansion. They've recently entered China, the Middle East and Korea, and those markets are growing in excess of around 70%, albeit off low values.

But it shows they are entering new markets and adding new revenue to the business that otherwise wouldn't be there, and you wouldn't just be beholden to the cycle.

Breville has faced tariffs, inflation and a huge manufacturing shift. What did you make of its margin performance?

Margin was stable. Gross margin only declined by around 60 basis points, but in the face of tariffs in their biggest market, the US, and in the face of inflation and increasing freight costs, that's a phenomenal outcome.

They've moved a significant amount of their manufacturing out of China in a relatively short period of time.

"To do that and deliver stable margins is a phenomenal result and a real testament to good management execution."

The third thing that stuck out to us was free cash flow. They generated better free cash flow, the capitalisation of intangible development was lower by around $6 million and the balance sheet is cash.

So this is a strong result in the face of a very difficult market.

Competition is increasing. Could the likes of De'Longhi and SharkNinja eat Breville's lunch?

The competition is increasing - we're seeing competitors like De'Longhi and SharkNinja step up promotional activity. There are other players ramping up their product offering, such as Smeg.

Within the appliances space alone, competition is increasing and so the demand for shelf space is increasing.

But at the same time, Breville's got a long history of product innovation. They're one of the pioneers in the sector.

What they said in this result was they've actually increased their share of shelf space, particularly in Best Buy.

Best Buy went out to its suppliers and effectively said: 'you're facing tariffs in the order of 10% to 25%, and we want to back players that can absorb some of that.'

Breville was able to do that without impacting their margin.

"As a result, they took share from other players that weren't able to absorb that. Competition is increasing, but Breville's strategy and defence is more than offsetting that."

Breville sells $1,000-plus coffee machines. How can that possibly be defensive in a cost-of-living crisis?

Customers are slightly trading up from instant coffee to homemade barista automatic machines.

But where they're funding that is from cutting the $5 barista-made café coffee; if you make a coffee at home, it's 50 cents. If you go out to a barista, it's $5.

"Customers are being squeezed, but in this instance homemade coffee is still growing because it's actually defensive to have it at home."

On aggregate, though, I think the thematic of spending less plays into the hands of Breville.

If you can outlay $1,000 to $1,800 for a machine but you're saving $5 a day, five times a week, 250 days a year, it stacks up.

There's a payback of almost 1.2 years on the machine.

So what's the outlook for Breville from here?

Management has called out a challenging macro environment and they generally don't give guidance, but what they have said is that it is a more difficult environment.

Having said that, they've noted that particularly US consumer demand for their premium products has remained resilient. Part of it is their product innovation. They've grown some share within Best Buy.

But it's also that new product development. Even in cooking sales, they've called out the IQ toaster and fryer range, and that's growing in the double digits.

Then you've got the young markets – China, Korea and Mexico – coming off a low base and growing double digit as well.

The outlook from here is continued high-single-digit growth and probably less margin pressure because they've worn a lot of the impact around tariffs and supply chain.

We're also monitoring their peers.

SharkNinja recently called out its Luxe espresso coffee machine growing double digit, while De'Longhi upgraded its revenue growth guidance by around 100 to 200 basis points, citing strong consumer demand for coffee.

"It's just that addiction weaving into people's homes. People want a coffee and they're buying these machines, so it's proving much more resilient in the face of what I would say is a very challenging macro environment."

What's the big upside investors might be missing?

Something we haven't spoken about is that the big upside is potentially China, which is a 1.4 billion population market.

Our analyst did a trip to China over a year ago and did quite a bit of work on coffee consumption habits. In China, it's exploding.

What you're seeing is the growth of home automatic machines, but Breville has only recently entered China directly. Before that, they had a distributor.

When you have a distributor, it doesn't execute as well, whereas De'Longhi and SharkNinja have been in that market for some time. 

The feedback we got was that the growth of Breville in China is very strong.

"China is an untapped market for Breville and particularly that could be a hidden growth story that the market may not fully appreciate."

I think that's a potential source of upside.

The second source of upside is that most people focus on the coffee side.

But in this result they've called out some strong double-digit growth in the home appliances products, and they're using AI to create more innovative products - products you can set from your phone, whether that be starting something up, heating or changing the functionality.

Double-digit growth in home appliances is something we haven't seen for a while, so that could be another source of hidden upside down the track.

What are the biggest risks?

The biggest risks are twofold.

Competition is becoming more intense. There are definitely more players coming to coffee. It's growing fast and you're competing against global giants who typically have more scale and bigger marketing budgets.

That's something to keep watch on.

If you look at the technology innovation curve, some of these competitors have caught up pretty quickly and SharkNinja is a good example.

The second thing to be mindful of is management. Management has executed so well, but if there was to be a change of management, that could always increase the risk in this stock.

You need to find a global executive who's willing to come and work in Australia to run a business out of Australia, when normally most of these businesses are run out of the US or Europe.

So management succession is always a hidden risk for this business.

And lastly, margin pressure. If these inflationary pressures don't ease, Breville has absorbed a fair bit of that to date, but there's a limit to how much inflation they can absorb.

Breville trades around 30 times earnings. What could you be wrong about?

On prima facie, if you look at Breville, you'd say 30 times earnings, it's fully valued. It's an easy one just to ignore.

But what could possibly happen – and we've seen this before – is ASX-listed companies with a global presence that execute well do fall prey to these global players looking to buy market share or buy growth, particularly Japanese-led conglomerates that have a much lower cost of capital.

"By simply saying Breville's too expensive to own, you could potentially miss that this business could end up being owned by someone like LG, Samsung – someone who's wanting to enter the category."

That's something I do think about; the bigger Breville gets, the more it goes up on the radar of some of these companies.

If you look at the market caps of SharkNinja and De'Longhi, they're multiples of Breville. The scope to grow value from here is still high, particularly if you had a global conglomerate with global distribution that could pump more into sales and marketing.

What's your overall view on Breville after this result?

We are positive on Breville in the sense that it's a global growing brand.

They're one of the pioneers in automatic espresso coffee machines and it's a really well-regarded management team that's executing on their three-pronged strategy: market share, product expansion and new markets.

And management execution has really shone in this result.

"If this was a mediocre management team trying to move your supply chains out of China, incurring tariffs and massive inflationary headwinds, most companies would have delivered massive margin crunch. Breville has delivered a fantastic result in that environment, which highlights how well this business is run."