Breville’s (ASX” BRG) gross margins have taken a hit due to US tariffs on Chinese manufacturing. Gross margins in the first half of fiscal 2026 fell 130 basis points from the year prior to about 35%. The company has been diversifying production to lower-tariff countries like Mexico, Indonesia, and Cambodia.

Why it matters: We think Breville’s margins have bottomed. The US is nearly half of Breville’s revenue, and most of its manufacturing is based in China. But China-originated US inventory should reduce further amid manufacturing diversification. Outside the US, margins have broadly improved.

The bottom line: We raise our fair value estimate for narrow-moat Breville by 5% to AUD 23 per share. About half the increase is due to a lower weighted average cost of capital assumption, and about half is due to the time value of money.

  • Shares in Breville are materially overvalued. We think the market is extrapolating much stronger long-term growth from new product categories and geographic expansion. Entering new countries has been a key driver of Breville’s strong revenue growth in recent years.
  • Breville’s strong brands command pricing power in North America and Europe, underpinning its narrow economic moat. But we expect expansions into China and the Middle East, where Breville has yet to build meaningful brand equity, to be less lucrative.

Between the lines: Under our updated discount-rate framework, we lower our WACC estimate for Breville to 8.8% from 9% prior. Our beta of 0.9 reflects our unchanged view of the company’s cyclicality and leverage, now captured with greater granularity.

  • The lower beta was partially offset by slightly higher country risk premia given Breville’s revenue exposure to higher inflation countries in Asia and Latin America.

Breville’s brands command pricing power, underpinning its Narrow Economic Moat

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 observable in North America and Europe, where Breville is able to command a substantial price premium over 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 to 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 that sales in the US have expanded at a double-digit compound annual growth rate over the last decade. We expect Breville to 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 to 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 existing 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.

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.

Bears say

  • The implementation of further tariffs 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.