Blackmores to Profit off Flu Season
A seasonal pick-up of consumers purchasing vitamin-C tablets and other health supplements is providing a revenue bump for Blackmores (ASX: BKL). However, this is not likely to trigger a price surge like that of 2014-2015 on the back of extraordinary demand from China.
Since the company’s value declined from a peak of $220 in 2014-2015 to inbetween $90 and $100 currently, Blackmores’ slump has mainly been attributed to a slowdown of sales to China. This decrease is said to be due to onsellers on e-commerce sites and the company grappling with a vacuum at the top of its executive ranks.
Looking at their most recent third-quarter analysts briefing, the company notes revenue decreased 4% compared to the previous corresponding period. This was attributed to softening sales in the quarter due to a deliberate move to clear inventory channels in China and a non-repeat of promotional activity from the previous corresponding period. China segment sales are up 19% which were estimated to decline by ~6%, impacted upon by slowing sales through Australian retailers.
The overall story in Asia is positive with Hong Kong up 18%, Taiwan increasing 81%, while Korea and Indonesia increased 13% and 99% respectively. While profit has fallen this quarter to $10 million, with operating expenses lower by 1%, Blackmores proudly announced its continued market dominance of almost 15% market share domestically.
Morgan Stanley analyst Tom Kierath is still cautious on Blackmore, but has lifted his 12-month price target on the stock from $75 to $84 – he expects Blackmores to report a net profit after tax of $64 million. Credit Suisse also shares a similar position and has a “neutral” rating and a 12-month price target of $85. This has led the stock to experience a period of volatility last week, with shares surging 6.14% on May 30th, only to fall 4.46% the following day.
Forecasts predict that this year’s flu season is expected to be one of the worst seasons Australia has experienced in decades. Local health authorities say the flu season has started earlier than expected, which is likely why first quarter sales in 2019-2020 are expected to rise on the back of the macro-trend. Laboratory-confirmed flu cases are “well ahead of any of the previous five years at this early stage in the season” Mr Kierath said in the Australian Influenza Surveillance Report.
Another indicator that sales are spiking is Google search data in Australia for keywords including “flu”, “cold and flu”, “vitamin C” and for Chemist Warehouse – the largest domestic retailer for Blackmores supplements and competitors such as Swisse. Mr Kierath said he expects this information to translate into strong sales figures heading into the June-quarter and September-quarter sales, after a 26% decline as the domestic retail channel was cleared.
Blackmores’ main rival domestically – Swisse – which was purchased for $1.7 billion by Hong Kong-listed Health & Happiness in late 2015 and 2016 in a two-tranche acquisition also experienced some hard-ship as ‘daigou’ traders backed off purchasing Australian supplements.
Swisse sales reportedly dropped 25.2% for the three months ended March 31, according to Health & Happiness chairman Luo Fei. However, Chinese sales increased 32.2%.
“The sales drop in the Australian market was due to new China e-commerce regulations that started from January 1, 2019, as a result of which some daigou’s have de-stocked inventory and reduced trading,” Mr Fei said. The ‘daigou’ traders – who purchase large volumes of vitamins and mineral supplements from Australian retailers and sell them on e-commerce sites in China – were a predominant force that drove Blackmores sales higher towards the end of 2014 calendar year.
The company also has been reviewing efficiency and productivity levels. Highlighting a notable increase to staffing in 2015-2016 and 2017-2018 saw numbers increase 18% (over 1400 employees) all while sales were largely flat. As a result, net sales per employee fell 15% and if Blackmores were to return to 2015-2016 staffing level, it would imply $27 million in cost savings. Marcus Blackmore concedes that the company became too bloated and needed to return to being “lean and mean” – which likely means layoffs.
Blackmores’ can expect to receive a seasonal domestic spike in supplement sales, off the back of anxious consumers concerned about the eminent flu season. The season is expected to be harsher than most with health authorities warning it could be the worst in decades, this coincides with pharmacies and general practitioners in NSW running out of influenza vaccines.
By Sydney Robertson
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