Health supplements company Blackmores Limited (ASX: BKL) has been one of the best performers on the Australian market in September, with its share price rising 18% to $85. The jump has occurred despite Blackmores delivering a weak FY19 earnings report in August.
FY19 earnings disappoint
For the year ended 30 June 2019, Blackmores reported revenue of $610 million, which was 1% higher on the prior period. On the bottom line, net profit after tax decreased by 24% to $53 million. Underlying net profit was down 21% to $55 million after adjusting for one-off costs related to streamlining the business.
Issues in the China segment of the business was one of the main reasons for the financial underperformance. Sales in China (key export accounts and in-country sales) fell 15% to $122 million. The fall in sales was attributed to changes in e-commerce laws that took effect from 1 January 2019 and shifting consumer buying patterns. Weaker sales and increased investments in brand and expansion in in-country capabilities resulted in earnings before interest and tax in the China segment declining 40% to $21 million.
Blackmores responded to the legislative changes by deliberately reducing e-commerce platform inventory in Q4. As a result of this measure, Q4 group revenue decreased 10% to $149 million and net profit fell 50% to $9 million.
Outlook
Blackmores expects trading conditions in its channels to China to continue to be challenging for the first half of FY20. The change in Chinese e-commerce laws, costs associated with restructuring and the Braeside acquisition are expected to result in first-half profit being lower than the prior corresponding period. In its outlook commentary, management noted that the second-half is expected to benefit from operational efficiencies due to its Business Improvement Plan, which is projected to achieve $60 million in cumulative savings over 3 years.
Foolish takeaway
The Blackmores share price has risen 11% following the news that Bellamy's Australia Ltd (ASX: BAL) had received a takeover approach from China Mengniu Diary Company (which valued the company at $1.5 billion). Some investors believe that Blackmores' exposure to China could make the business a takeover target as well.
Blackmores is being valued as a growth company with shares currently trading for around 27 times trailing earnings. Zooming out and viewing the performance of the business over the last few years, we can see that the company has not managed to exceed its record performance in FY16. Earnings per share in FY19 of $3.09 was 47% lower than the $5.81 reported in FY16.
Whilst an investment in Blackmores looks more attractive from a valuation perspective than it was a few months ago, the issues in China are material to the business and the valuation is still high. Short interest in Blackmores has notably risen over the last month to 9.92% as short sellers believe the company is overvalued. In light of these concerns, I think it would be prudent for long-term investors to wait for the company's half year-result in February before considering an investment.
