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Blackmores needs a boost

Vitamins and supplements supplier Blackmores (ASX: BKL) business is in decline in Australia, thanks to increased competition and structural changes in Australia’s pharmacy sector. The company’s share price has hit $25, the same price as three years ago.

At the company’s Annual General meeting (AGM) today, the company announced that its first quarter profit had dropped by 31% to just $5.4 million. Blackmores says the Australian retail market remains ‘highly challenging’. In a bid to boost flagging sales, a new managing director for Australia and New Zealand has been appointed.

The company says pricing pressure has intensified as many of its competitors face financial restructuring or sale, showing how the industry as whole is struggling. The continued growth of discount pharmacies and the decline of traditional community pharmacies and health food stores adds to the challenges.

Additionally, Blackmores has been hit by the fall in the Australian dollar, increasing the cost of raw materials. Competition for supermarket shelf space has grown as retailers Woolworths (ASX: WOW) and Coles – owned by Wesfarmers (ASX: WES) – in particular, demand bigger discounts, cheaper prices and lower margins for Blackmores’ products. Supermarkets have also been destocking as they increase the shelf space for their private label branded products.

The company says it will need to adapt to lower margins in future, and is reviewing its cost structure in an attempt to protect its current margins.

The one good piece of news is that the Asia division and BioCeuticals, its practitioner branded business, grew sales by 19% and 7% respectively. Blackmores has established operations in China, Thailand, Malaysia, Hong Kong, Singapore and Taiwan, and the company’s exposure to an emerging Asian middle class should see its offshore operations perform well in future.

Foolish takeaway

In the 2013 financial year Blackmores reported a 10% fall in net profit to $25 million, and looks on course to record another fall in annual profit in 2014. Australia still generates the lion’s share of earnings, and it will take time for expected growth in Asia to offset falling sales locally. Trading on a current P/E ratio of 16.9 times, Blackmores looks expensive, and the fully franked dividend of more than 5% looks at risk of being cut.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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