Beauty and the beast: Why Zoe Foster Blake is the least of BWX’s problems

When ASX-listed beauty brand owner BWX forked out $89 million to buy a 50.1 per cent stake in celebrity Zoe Foster Blake’s skincare business Go-To it in August last year it was smiles all round.

While the price tag raised eyebrows, BWX’s share price was trading over $5 and Go-To was a big name to bring into the brand stable, which also includes the successful Sukin line of products.

Less than a year later, BWX’s is suddenly in financial turmoil and its share price has fallen to just 74 cents this week. While some in the market have blamed the company’s issues on the high price it paid (and needs to pay in future instalments) for Foster Blake’s skincare business, there is more to the company’s troubles than one over-priced transaction.

Go-To founder Zoe Foster Blake holds all the cards whoever controls BWX. Credit: James Brickwood

BWX’s recently appointed chief executive Rory Gration had a lot to explain late last month when he fronted disgruntled investors and confused analysts to explain the company’s need for a life-saving cash injection by issuing new shares at just 60 cents, nearly half its most recent share price.

Only six weeks earlier, Gration had delivered an investor day presentation that assured the market that all was well with the beauty products group.

But something had gone very wrong, very quickly. And it was not the onerous contract to acquire the rest of Foster Blake’s Go-To business for a cash outlay that was prohibitively close to BWX’s entire valuation, although it certainly added to the woes of the beauty and health products retailer.

Billionaire Andrew ‘Twiggy’ Forrest was caught in the cross-fire. His private investment group, Tattarang, acquired a 16.9 per cent stake in BWX for $30 million – or $1.10 a share – just a week before the stock went into a trading halt on June 24. Four days later, BWX announced a massively dilutive equity raising at 60c a share to raise $23 million of desperately needed cash and a board renewal process.

The stock had already been on a steep decline this year as the reality of inflation, rising interest rates and recessionary conditions hit home. Or, more specifically, threatened to hit consumer wallets. The current dour economic environment represents an abrupt turnaround from the boom-time for brands like Go-To which watched its online sales soar during the pandemic as consumers treated themselves with skincare products.

Changing consumer sentiment was not the big issue, though. It was merely one of a number of factors that made it untenable for BWX to continue an unsavoury practice that is rife in the retail industry: channel stuffing.

BWX’s Gration admitted that the big change, which led to the group slashing profit forecasts, was that it would no longer be able to engage in the practice where retailers inflate sales by ‘selling’ more products to their distributors than they can readily sell to consumers.

The retail winds had changed so rapidly that this practice of channel stuffing - which the company had relied on in the forecasts provided in May - was no longer tenable just 6 weeks later.

“Retail conditions have been challenging and changing, putting more pressure on our retail partners and ourselves with increasing inflation, price increases and interest rate increases,” Gration explained to analysts and investors on a conference call following the capital raising announcement in late June.

“When we provided a trading update in May, our plans assumed selling into and holding a certain level of inventory with select wholesale retailers in June. The challenging market conditions have caused us to change our approach.”

BWX’s retail partners were already stacked up with its goods thanks to a pandemic that pushed retailers and manufacturers from a low-inventory just-in-time model to a high inventory just-in-case model. There was also an extra dollop of inventory in the sales channel as BWX prepared to ramp up its new distribution centre.

The traditional end-of-financial-year push of goods into the distribution channel to make the financial numbers look good, was not going to work.

“We are talking about four weeks of revenue out of the business,” was how Gration explained the inventory and sales hit which he said would ensure it was “no longer a famine to feast model”.

It led to BWX slashing forecasts for the year ending June 30. The interruptions to its plans, will also trigger the writedown of asset values when the company releases its full-year results next months. This will include the purchase of its 50.1 per cent stake in Go-To last September. Underperforming assets will be put up for sale, but this is not expected to include Go-To, or the flagship Sukin brand which has performed well.

Analysts were supportive of the need to stop channel stuffing.

“BWX ended its historical practice of selling a few months’ worth of Sukin stock in June each year to pharmacy/wholesale customers. While the decision has cost BWX $25 million in revenue and $17 million of earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2022 financial year, moving forward we believe it makes sense,” UBS retail analyst Apoorv Sehgal said in a note to clients.

But while BWX said sales and earnings will bounce back once it stuck to selling its retailers – like Chemist Warehouse – only as much of the Sukin products as it needed, analysts were not so sure.

“We are now cautious on execution given recent challenges,” said Macquarie which sees potential downside risk to the company’s guidance given the execution problems to date.

And this leads us to the Zoe Foster Blake and her right to sell the rest of Go-To to a financially stricken BWX.

The big issue is not the $89 million BWX paid for a controlling 50.1 per cent stake in Go-To. The group sold shares at $4.85 each to pay for that cash outlay.

But as part of the deal, Foster Blake was given the option to sell the remainder of the business to BWX, as early as September 2024, when her undertaking to remain with the company ends. This second transaction is currently recorded in the BWX accounts as a liability of $93 million.

Gration says that the deal is subject to Go-To’s market valuation at the time of the sale, which is reviewed every six months within the BWX accounts.

It represents a double-edged sword for BWX. A slashed valuation for Go-To confirms it paid too much for the business. But a strong performance by the beauty brand could increase the massive cash outlay itfaces to buy out Foster Blake. The company is already paying $10 million of the recent cash it raised to its lenders, which will allow the embattled group to breach debt covenants this year.

“That’s a critical reason to get net debt down ASAP,” Gration said of the potential payment to Go-To investors.

The irony is that Foster Blake says she was looking for a business partner, not cash, when pursuing a deal last year.

“We weren’t in a position where we needed an investment or anything like that - I just wanted a partner,” she told Mamamia in an interview.

“I just wanted some good heads around the table. And I particularly wanted someone who could help us grow overseas, because the world is littered with brands that tried and failed. And it’s a really expensive, hardcore exercise to get into an international market.”

Foster Blake is currently entertaining her 785,000 Instagram followers with pictures of her Lake Como holiday with her family including husband, Gold Logie winner Hamish Blake, and has not commented on the massive changes at the group which controls her startup. Go To representatives declined to make her available for an interview for this story.

Foster Blake has the cash and the option to sell her remaining stake to BWX, and will retain ownership of her social media following and intellectual property associated with her personal brand, if she decides to walk away.

The BWX CEO and chairman who hatched the deal with her last year – Dave Fenlon and Ian Campbell – will not be there when she makes her decision in 2024.

But she won’t need to wait for the board refresh to see who will be in charge.

While Tattarang will be getting only one board seat, the more important fact may be that the Forrest vehicle and Bennelong Funds Management collectively own more than 40 per cent of BWX, and will have a decisive say on the makeup of its future board.

Bennelong Australian Equity Partners’ investment boss Mark East, who manages the BWX stake, declined to comment about the investment. Forrest’s Tattarang would not comment beyond a statement signalling its intent to remain a long-term investor having lifted its stake to just below the 20 per cent threshhold which would necessitate a takeover bid.

One thing we know for sure, they will not be taking Foster Blake lightly.

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