Why the Yowie Group Ltd share price collapsed 35% today

The Yowie Group Ltd (ASX:YOW) share price fell 35% this morning after the company announced a downgrade.

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The Yowie Group Ltd (ASX:YOW) share price fell 35% this morning after the company announced a downgrade. Yowie announced that its net sales were up 22% for the quarter, but it was revising its full year forecasts downwards. Previously forecast sales growth of 55% is now expected to be up only 17% for the full year.

First half sales were up 7.5% on the first half last year. After a catastrophic fall in the first quarter, US sales stabilised and were flat at US$4.4 million, while Australian sales came in 15% above expectations.

Margins remained steady, as did market share. Sales were downgraded for several reasons:

  • The new Discovery World product will fall short of expectations as retailers are 'hesitant to bring on more, lower priced offerings to the crowded set.'
  • The deferred Canadian launch late in Q1 (October 2017) will lead to lower full year sales activity
  • Reduced promo opportunities at Yowie's largest retailer (Walmart)

Additionally, CEO Bert Alfonso resigned yesterday and was replaced by Mark Schuessler, the Chief Operating Officer (COO). It was clearly a disastrous update that follows on from a long list of recent issues.

The Discovery World falling short of expectations particularly jumped out at me because it suggests that the company made sales forecasts before it knew whether it could sell the product.

For example, if retailers are hesitant to bring on new products in a crowded market, wouldn't that become apparent quite early in the process when Yowie started marketing Discovery World to retailers?

Instead, it looks as though Yowie has forecast sales from Discovery World even before it knew whether most retailers would pick up the product. This follows on from a previous forecast involving Canada sales that the company completely missed in June last year.

Ordinarily a missed forecast might not be a big deal, but this company has made forecasts every quarter for the past 18 months or so and from memory it's missed almost every one.

Yowie's forecasting apparatus is clearly broken and I would suggest that the company quit forecasting entirely and focus on walking the walk with sales and cost controls.

Other things that grind my gears are the continued lack of disclosure around same store sales at major customers. According to page 48 of the 2017 annual report, 63% of all of Yowie's sales are to one customer (presumably Walmart, although the customer is not named), so news that 'reduced promo opportunities at Yowie's largest retailer' impacted the sales growth forecast would appear to be vitally important news.

Even though US sales stayed flat, 'reduced promo opportunities' could imply sales are reversing at Walmart, yet again Yowie has given no disclosure on its 'same store' or 'like for like' sales.

It also chose to omit the glossy statistics about its rapid growth in its social media following from today's announcement.

Ironically, the upside of all these downgrades and slowing sales performance is that Yowie may finally have to do something about its expensive cost structure. With sales growth slowing, the only way to become financially sustainable (Yowie's substantial cash balance notwithstanding) is to cut costs.

Staff and corporate costs account for more than 50% of sales, so I expect to see some restructuring going on soon.

I was previously – wrongly – bullish on Yowie and my views have now changed to the point where I recently sold almost all of my shares. In fact, I even selected the company as my top 'short selling' idea in November as part of an informal competition between Foolish contributors.

I kept a really tiny handful of shares to ensure that I followed the company a while longer to see if my thoughts were borne out.  With the downgrade today I'll be selling the remainder of my shares (when trading rules permit) – maybe I'll buy a Yowie with the proceeds.

I think this company is not investment grade and should be avoided entirely.

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.

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