The Blackmores Limited (ASX: BKL) share price has been pummelled in recent times, nearly 60% off from its 2016 highs.
The vitamin and supplement distributor reported disappointing half-year results earlier this year, however, a revised strategy and changes in federal regulations could make the Blackmores share price a potential long term buy.
Disappointing earnings
Blackmores reported half-year earnings in mid-February which fell short of market expectations. The poor results and a warning of second-half profits for 2018-19 saw the Blackmores share price plunge nearly 24%. The company announced that net profit was up just 0.4% to $34.3 million, in comparison to market expectations of $37 million.
Despite other companies with high Chinese exposure such as A2 Milk Company Ltd (ASX: A2M) reporting strongly, Blackmores saw revenue in China fall 11%. In addition, first-half Chinese EBIT was $11.7 million compared to $20.8 million the year before. Blackmores cited changing sentiment and high inventory levels among resellers as the reason behind the fall in consumer demand.
Although demand was slower in China, Blackmores saw sales revenue in Australasia increase 9% to $319.4 million. Operations in other Asian countries also reported strongly, with sales revenue in Taiwan increasing 150% and up 67% in South Korea. In addition, Blackmores reiterated that it will pay the same dividend of 150 cents as it did last year.
Change in China strategy
The inability of Blackmores to adapt to slowing consumer demand in China reflects an inefficient supply chain and distribution model. The original strategy to China was through daigou channels that revolved around Chinese tourists buying products to either take back to China or re-sell online.
In a bid to streamline and improve margins, Blackmores appointed a new manager for the Chinese market and announced intentions to expand technical expertise and overhaul operations. The new strategy will involve Blackmores increasing direct sales to Chinese consumers by aligning itself with more sophisticated operators and establishing a larger e-commerce presence through Alibaba.
Australian made
Last week the federal government announced that complementary medicine companies like Blackmores will be allowed to brand export products with the 'Australian Made' logo. The badge carries high-brand recognition and gives consumers the confidence that supplements they are purchasing have been manufactured in Australia under the highest standards of quality assurance.
Foolish takeaway
In my opinion, Blackmores has attractive fundamentals and great management which should see the company do well in the medium to long term. The revised strategy and 'Australian Made' branding has great potential, however, it would be more prudent to wait for improvements in Chinese consumer demand before buying.
