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Another retail disappointment: Asaleo Care Ltd share price smacked

Personal care and hygiene company Asaleo Care Ltd (ASX: AHY) saw its share price smacked down more than 30% today to as low as $1.365, after downgrading its earnings.

It’s yet another example of a retailer disappointing shareholders.

However, shareholders should have been aware that the company was facing headwinds – Asaleo warned in February that it was facing strong headwinds (see below) in price discounting in the marketplace, increased trade spend and higher input costs from pulp – which is also priced in US dollars.

Asaleo Feminine Care warning Feb 2016

Source: Asaleo presentation February 2016


However, what is concerning is that the company has only now advised the market of the impact of those factors to its half year results and its 2016 full year results – especially since the company knew in February that it was facing headwinds.

Additionally, the Australian dollar plunged below US 72 cents in May – which would likely have accelerated losses. And pulp prices have continued to rise – a factor the company also warned about previously.

Investors should also be wary of companies that are forced to lower their prices to support their market share – particularly when that company supplies commodity type products like toilet paper, feminine hygiene products and tissues. In that sense, Asaleo faces similar competition from lower priced products as Woolworths Limited (ASX: WOW) and Coles face from the likes of Aldi and Costco.

What Asaleo also faces is the same problem most suppliers to Australia’s two dominant supermarkets face. If Asaleo wants to sell its products through them, Coles — owned by Wesfarmers Ltd (ASX: WES) — and Woolworths hold the upper hand when it comes to negotiating prices.

Look at the problems Coca-Cola Amatil Ltd (ASX: CCL), Patties Foods Limited (ASX: PFL) and Goodman Fielder Ltd have had in the past – with all three forced to drastically cut their prices and margins.

Asaleo has now introduced an ‘Every Day Price’ on its feminine care and incontinence care products. In other words, the company has lowered the prices of its products – cutting its margin in the hope of selling more product. That may or may not work out – it’s still early days as the company notes.

Foolish takeaway

Asaleo appears to be taking a number of steps to differentiate itself, but while the majority of its products are sold in supermarkets, the company is highly dependent on its competitors acting rationally and the goodwill of the supermarkets.

That’s something the company has very little control over.

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Motley Fool writer/analyst Mike King owns shares in Woolworths and Wesfarmers. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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