Blackmores share price: where next following profit downgrade?

We examine the details behind the latest Blackmores (ASX: BKL) Trading Update.

When the Aussie markets opened this morning, the Blackmores (ASX: BKL) share price fell as much as 22.85%. Though those losses moderated by the afternoon, the stock was still down by ~13% when the market closed.

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Blackmores share price: what drove this sell-off?

Investor paranoia likely reached new peaks on Monday, when the stock was put into a trading ‘pending the release of an announcement.’ No further specifics were given at the time, but investors, in the lead-up to this release, were broadly speculating whether the coronavirus would have a positive or negative impact on the stock.

Today that trading halt came to an end, and with it a nasty update.

First, Blackmores revealed that it expected first-half revenues to come in at $303 million, against earnings (NPAT) of $18 million. Not the worst revelation; the company had after all already announced that challenging conditions were 'expected to continue during the first-half of FY20,' during the FY19 report.

Those results remain subject to an auditor review, it should be noted.

The real problem with today's Trading Update was the revelation that full-year FY20 earnings (NPAT) were expected to come in significantly lower overall: now projected to come in between $17 million to $21 million. H2 revenues are also expected to be stagnant.

These revised figures, which point towards a significantly weaker second-half, were attributed to cost increases, operational difficulties and the Coronavirus.

Commenting on these revised figures, Blackmores' Chairman, Mr Brent Wallace said:

'We understand and acknowledge that shareholders will be bitterly disappointed with the financial performance of the business.'

Stressing that progress is being made though, Mr Wallace continued by saying:

'Our new management team is progressing plan to turn around the business, which involves getting better control and visibility on our fixed costs, improving gross margins and significantly improving quality of our earnings in a more sustainable way.'

Other issues in focus

One of the key issues leading to this downgrade arose from the company’s recent Braeside production facility purchase, which Blackmores took ownership of in late-2019. As it currently stands, 'the forecast product mix, volumes and material costs will have an estimated combined adverse impact of $9.5 million on the cost of goods sold,' in the second-half, the company warned.

The issues did not end there however, with the company also noting that regulatory changes – as they relate to the labelling Blackmores uses in its product line-up – is also expected to have a $7 million earnings (EBIT) impact.

Finally, the company also flagged its plans to rectify eroding margins, noting that from Q4 onwards, Blackmores would ‘moderate’ its promotional activity. Though such strategies are expected to yield volume and price alignment benefits in the years ahead, they are also expected to have negative short-term consequences, contributing to a weaker H2 FY20 earnings outlook.

Blackmores further announced that it would not be paying an interim dividend.

The Coronavirus paradox

The impact of the Coronavirus also got a brief mention today, with it being pointed out that though the emergence of this virus has led to greater demand for Blackmores’ products, it has also stifled some of the company’s key supply chains.

The Blackmores (ASX: BKL) share price currently trades at the $77.87 mark.

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