Downgrade: Is it time to sell Yowie Group Ltd?

The Yowie Group Ltd (ASX:YOW) share price fell 6% today after another downgrade.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Sean O'Neill owns shares of Yowie Group Ltd. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »