Blackmores: Hopes Pinned On Restructuring

Australia | Nov 01 2019

Blackmores’ first half profit warning has sent analysts into a scramble to downgrade forecasts, but turnaround potential has been boosted by a shift in strategy.

-Big first half downgrade for Blackmores
-Improvement expected in second half
-Brokers like new business strategy
-But it will all take time

By Greg Peel

Dietary supplement purveyor Blackmores ((BKL)) has seen its share price fall -36% since January amidst tough conditions in the company’s premier sales destination of China. Yesterday management warned first half FY19 profit will be flat on the second half FY18, representing a material downgrade to consensus forecasts.

Blackmores’s troubles began when Beijing implemented complex new e-commerce laws in January, aimed at tightening up a loosely regulated market and requiring operators to satisfy a certification process. At the same time, the company has suffered increases in product input costs and the cost of bedding down its recent Catalent acquisition.

A cost-out program underway is tracking to expectation and Blackmores introduced significant product price rises on October 1. However, two-thirds of cost-out savings will be used to reinvest in revenue growth while price hikes always present the risk of lower sales.

But the new CEO has a cunning plan, and it is this plan that drew the attention of analysts and sent the share price higher on the day when it otherwise should have tanked. A new Business Transformation Plan targets five goals: (1) Lead with purpose; (2) Rejuvenate Australia; (3) Deliver a sustainable growth model in Asia; (4) Products and services to be powered by education; and (5) Drive operational excellence.

Which all sounds a bit “motherhood”, but backed up by management restructuring and the appointment of new executives with health sector experience and, perhaps most importantly, a Chinese managing director of the China operation with impressive e-commerce experience.

The most important of the strategy’s five goals, as analysts see it, is point (3), which is to be achieved through pursuing strategic partnerships in China. Brokers agree the potential for a Chinese partnership or joint venture would be a positive share price catalyst.

Citi believes a Chinese partner could potentially improve China distribution, tailor marketing and new development for Chinese consumers and improve regulatory capabilities.

But at this stage it is all about potential, while conditions remain challenging. Morgans echoes consensus in suggesting the business transformation program makes strategic sense and should drive solid top and bottom line growth, but given said short term challenges and a lack of actual financial targets, converting a strategic plan into earnings forecasts is rather difficult.


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