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Here’s why Gage Roads Brewing Co Limited was smashed today

What: Australian brewer Gage Roads Brewing Co Limited (ASX: GRB) has seen its share price hammered this morning following the release of its sales results for the second quarter. The stock fell as much as 36.67%, or 5.5 cents, to trade at just 9.5 cents per unit.

So What: In November last year, the company said that short-term sales would be affected as customers reduced their inventory levels in order to take advantage of Gage Roads’ new warehouse strategy. While that is one reason cited for the 8% decline in sales for the first half (total sales volume was 864,000 carton equivalents), the company also blamed a “category-wide softening of the beer market during the quarter” as a primary reason behind the decline. Revenue also declined 8% compared to the prior year’s comparative period.

Gage Roads has two segments, being proprietary brand brewing and contract brewing. While sales to contract brewing customers declined by 6% for the half, sales of its proprietary products (primarily through its major customer Woolworths Limited (ASX: WOW)) declined by an alarming 19%.

While it launched a number of new brands, the distribution of them during the busy Christmas period was more difficult than expected which meant they did not fully benefit from the peak sales period. Pleasingly, the company said that the stores which did have reasonable ranges of its new and existing products displayed strong sales, indicating an uplift in future sales.

The outlook for the remainder of the year wasn’t too rosy, either. More than five-million shares changed hands after the company said that the softening liquor market during the traditionally strong summer months would likely provide lower volumes in the second half.

Now What: Although the shares are trading at a considerable discount to their closing price on Friday, investors need to remain wary of the risks facing the business. Despite its strong growth prospects, it maintains a heavy reliance on Woolworths as a major customer while volumes are also expected to fall further over the next six months. Investors might be wise to focus on some of the market’s other compelling growth stocks for now.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

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