Breville (ASX: BRG) manufactures 90% of its products in China, and about 45% of its revenue is generated from the United States, making the additional 34% tariff on Chinese-manufactured goods noteworthy. Nevertheless, the company maintained its fiscal 2025 EBIT growth guidance of 5% to 10%.

Why it matters: We make no change to our fiscal 2025 EBIT forecast of AUD 204 million, near the top of guidance. Breville had already pulled forward inventory in anticipation of tariffs, minimizing the impact this year. In the short term, we think Breville can offset the impact by increasing prices.

  • In the long term, Breville is diversifying its manufacturing footprint. The company has previously flagged moving US production out of China as a priority. While also affected by tariffs, Breville is initially targeting Mexico, Indonesia, and Cambodia.
  • We think a near-term hit to both revenue and gross margin in the US is likely, partially offset by price increases. We lower our fiscal 2026 group EBIT forecast by 5% to AUD 213 million.

The bottom line: We make no changes to our $21 fair value estimate for shares in Breville. We think the market reaction to tariffs illustrates the significant exuberance that is priced into Breville shares. Despite the negative market reaction with shares falling close to 19% over the last month, shares in Breville are still expensive.

  • We expect the bulk of Breville’s revenue growth to come from outside the US, with continued geographical expansion. Nevertheless, we expect subsequent entries into new countries to be incrementally less lucrative. The low-hanging fruit has been picked.
  • With a strong brand, which underpins its narrow economic moat, Breville has pricing power in the US. Tariffs of up to 25% in fiscal 2019, affecting about 10% of Breville’s goods, were largely offset by price increases.

The Breville and Sage brands support pricing power

Breville’s premium position in niche European and North American small appliances should continue to bear fruit, with strong earnings growth buoyed by global expansion. The company’s coffee machines in particular have established significant brand strength, underpinning durable competitive advantages. This brand strength is particularly prominent in North America and Europe, where Breville is able to command a substantial price premium to competitors and where retail pricing is routinely 10%-30% higher than in Australia. However, the small kitchen appliance industry remains competitive, and there are few significant long-term barriers to entry, limiting our economic moat rating to narrow.

We expect Breville’s North American business will continue strong growth. The firm’s strategy is to leverage its innovative, high-quality designs in the small appliance market segment and position brands at the premium end of the market. This approach has allowed Breville to command healthy margins while still growing market share. We estimate sales in the US have expanded at a double-digit compound annual growth rate over the last decade. We expect Breville will continue to take share from competitors before moderating toward a market growth rate, leading to our forecast of high-single-digit sales growth over the next five years.

We also expect Breville will enjoy much of the same success seen in North America in the UK and continental Europe. As the Breville brand in Europe was sold in the 1980s, Breville’s go-to-market brand in Europe is the Sage brand. This could be a blessing in disguise, with a separate brand allowing Breville to enter the region at the premium end of the market without any preconceptions from the persisting brand. Early signs are promising, with the firm enjoying a revenue CAGR of over 50% in the region since entering the UK in fiscal 2014, albeit from a low base. Entry into new markets and further penetration in existing markets should drive above-market revenue growth for years to come.

Breville bulls say

  • Breville enjoys significant brand equity through its Breville and Sage brands, allowing the firm to enjoy pricing power and high returns on invested capital.
  • Having built an impressive record of global expansion in North America, Breville’s management has proved itself an excellent steward of capital, and the European expansion appears set for significant growth.
  • Increasing expenditure on marketing and R&D allows Breville to remain at the forefront of product innovation and quality, improving brand awareness and ensuring a healthy pipeline of new product releases.

Breville bear say

  • The implementation of further tariffs, such as those applied in the US in 2018 and 2019, could hinder Breville’s capacity to maintain margins, weighing on profitability.
  • Despite positive early signs, the Sage expansion in Europe isn’t guaranteed to reach the same heights as enjoyed in North America, and Breville’s elevated expenditure may not pay off.
  • A softer consumer environment would place pressure on Breville’s volumes and ability to maintain pricing on its premium-priced, discretionary products.

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