Product Differentiation

The White House has made changes to its US$200bn list of Chinese goods on which tariffs will apply and raised the rate to 25% from 10%. Ord Minnett sees this development as a negative for sentiment, and notes that a number of goods in the Breville product line are included on the list. We calculate, however, that even in a worst-case scenario retail prices would need to increase by just 10% to counter the effect of 25% tariffs. We maintain our Buy recommendation and our target price of $15.16.

 

In our view, pushing through a 10% price rise is made more achievable by the relatively expensive, high-end nature of Breville’s products. Also, our calculation assumes 100% of the cost of inventories and 89% of the cost of goods sold are subject to the 25% tariffs, which in reality may not be the case.

 

If Breville was hit by the tariffs and chose to increase prices to maintain margins, the concern would be loss of market share, or simply lower sales. We do not see the first point as such an issue, as Breville’s competitors may be in the same situation. On the latter point, we note the majority of Breville’s big-earning products are not commoditised, so consumers may be more price-inelastic.

 

Breville is partially hedged against a weaker Australian dollar (AUD). The majority of the company’s manufacturing costs are borne in US dollars, and we would expect the margins of the Australasian business to decrease as the AUD weakens. Lower Australasian earnings before interest and tax (EBIT), however, will be partially countered by higher North American EBIT in AUD terms on translation. Although the effect is not a complete hedge, Breville hedges out the remaining exposure on a 12-month basis.

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