The Yowie Group Ltd (ASX: YOW) share price fell 6% to $0.30 this morning after the company released yet another downgrade in the lead-up to its full-year results announcement.
4th quarter net sales growth is expected to be 37% compared to the same quarter last year, and the downgrade to the company's forecasts "resulted from timing of Canada launch and customer front end programming change of Discovery World placement." Shares fell in my opinion for 3 primary reasons:
Inaccurate forecasts
This is the 3rd downgrade for the company in the past 12 months, with sales growth forecasts for 2017 going from 'roughly double', to +85% to 90%, to +70%, and now sales growth for the full year will be just +55%.
While this is still a strong headline rate of growth, it is particularly disappointing given management's tendency to over-promise and under-deliver.
It also appears that management has been relying on the Australian and Canadian expansions to meet their own sales growth targets, rather than using US sales as a baseline. In such a situation, all that must happen is for a launch to be delayed a few months (as happened in Canada) and poof, there goes your full year sales forecasts.
This is exactly what has happened. Worse, that these expansions were crucial to meeting sales guidance but was not communicated to shareholders particularly well, and it appears that the level of growth in the US market (both same store sales and/or new accounts being won) appeared vastly overstated as a result.
The real organic growth of the company in my opinion could be summed up in the market share data from Nielsen: 'Yowie reached .52% share versus .50% reported at the end of Q3 2017' which suggests ~4% quarter-on-quarter market share growth.
High-cost operations
Yowie has invested heavily in building out its executive capability. While this was necessary to bring in more expertise to drive sales and market share growth, it has also saddled the company with a very high cost base right at the same time as sales growth is falling far below expectations.
Based on the most recent cash flow report for the last 9 months, 36% of all Yowie's cash flows from sales have been chewed up just by administration and staff costs. This is unsustainably high, especially if the company can't scale up enough to generate profits. Management has forecast reaching break-even in approximately 12 months time.
Apparent focus on less-important things
I voiced suspicions to a colleague a week ago that a downgrade was coming, after Yowie released an announcement talking up its social media metrics. Did you know that 'The YouTube campaign reached an impressive 4.8 million views only ten weeks into the campaign'?
Or that "The long-term goal of 10k (Instagram) followers will be achieved in the short term as Yowie exceeded the target growth rate of 118% at an exceptional rate of 324% within the first 30 days of the campaign"?
I didn't, but I suspect shareholders would really have preferred to know how the chocolate is selling, are there signs of same-store sales growth at existing accounts, is media spending demonstrably contributing to sales, or a variety of other inconsequential things like that. When a company focuses on how many people like it rather than how much business it is doing, that is a clear warning sign in my experience – the necessity of building brand awareness notwithstanding.
Foolish Takeaway
Regular readers will know that I have been quite bullish on Yowie, naming it as my top stock pick a couple of times. I haven't sold a share, and to my mind the company still looks cheap if it can continue to grow sales over the next 3 years or so. However, Yowie has looked cheap the whole time I've owned it, and in my view it's time for management to work towards changing that.
I continue to hold my shares, but I consider my holding to be on a 'short leash', and would recommend that readers steer clear of it for the time being.
