Treasury Wine Estates cuts earnings guidance
The rise of private labels and aggressive discounting weigh on the Penfolds maker.
Treasury Wine Estates has cut its earnings guidance as leadership changes, the rise of private labels and aggressive discounting in its US division weighed on the Penfolds maker.
In a notice to the market late on Tuesday evening, TWE chief executive Michael Clarke brought forward the company’s first-half results for the six months ending December 31, which are still subject to audit, citing “challenging” US market conditions.
The winemaker is now expecting earnings to lift 5 per cent to $229.2m, compared with a 15 per cent uplift previously forecast.
“(This is due to) unexpected changes in our Americas leadership, resulting in a loss of execution momentum through the first half that will carry into the second half,” Mr Clarke said, adding a flat US wine market had weighed on earnings.
“Suppliers are trying to move surplus wine across the market at lower prices, resulting in an accelerated growth of private label, which is up approximately 15 per cent in a market that is flat to down.
“As a result of these market dynamics, we were unable to recover or offset higher US luxury cost of goods (COGS) and higher Australian commercial COGS, with higher levels of discounting required to try to maintain share across all price points.”
Mr Clarke, who will retire next year, said because of the rise of private label and aggressive market pricing in the US, TWE “walked away” from just under 500,000 cases of commercial volume.
He said he expected a similar second half, with stronger growth to return in the 2021 financial year.
“We have looked at whether we can recover this first half shortfall in the second half, but given the continued market dynamics in the US, we believe that those aggressive one-off recovery activities, for example pricing, would not be repeatable in financial 2021,” Mr Clarke said.
“Instead we would rather stay on our journey of sustainably growing profit, but for financial years 2020 and 2021, at slightly lower growth rates than previously expected and instead focus on resetting the US management team and rebuilding momentum in execution.”
UBS analyst Ben Gilbert maintained his buy rating for TWE, with a $20.50 price target, saying the company was still outperforming global peers and trading at a discount amid concerns about Mr Clarke’s retirement.
“We believe the discount reflects concerns growth will slow post Michael Clarke retiring in financial 2021, plus one-year consulting, and softer US (Report) and China wine markets,” Mr Gilbert wrote in a note to investors.
“We believe these concerns are overplayed, and that TWE is well positioned to deliver given margin upside from US distribution change, growing Asian demand for premium wine and penetration, and scope for accretive M&A.”
TWE intends to pay a dividend of 20c a share, fully franked, which is an 11 per cent increase on the previous corresponding period.
TWE’s shares fell 5.8 per cent on Tuesday to $16.68.
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