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Bubs share price drops lower after Q2 update

The Bubs Australia Ltd (ASX: BUB) share price has dropped lower in morning trade.

The infant formula company’s shares were down 3% to 90 cents following the release of its second quarter update.

They have since recovered and are trading 1% lower at the time of writing.

How did Bubs perform in the second quarter?

During the quarter Bubs continued its growth and delivered a record second quarter sales result.

According to the release, for the three months ending December 31, the company’s sales grew 21% on the prior corresponding period to $14.54 million.

A key driver of this growth was its Goat Infant Formula products. Sales of these products increased 77% on the prior corresponding period.

This was supported by a 15% lift in Baby Food sales, but offset by sharp declines in Adult Milk Powder and Fresh Milk products sales.

Why did Bubs shares drop lower?

Investors may have been selling Bubs’ shares today due to its performance in the China market.

During the three months the company’s sales in Australia grew 31%, but fell by 32% in the China market.

Management blamed the latter on the phasing of CapriLac off-take sales following the strong first quarter distribution in the Daigou Channel. Positively, China direct sales of Bubs nutrition products increased 44% through the Mother and Baby store channel.

Management commentary.

The company’s executive chair, Dennis Lin, said: “In our home market which represents 70 percent of our business for the quarter, total sales were up by a third compared to the same time last year, including a 25 percent increase in sales through major supermarkets and pharmacies, which includes Coles, Woolworths, and Chemist Warehouse.”

“Also counted in the Australian segment, the corporate Daigou channel continues to significantly contribute to our domestic revenues, increasing 21 percent over the previous comparable period.”

No guidance was provided for the remainder of FY 2020, but Mr Lin appears optimistic on the future.

He concluded: “Importantly, Bubs goat milk infant formula continues to be the most profitable segment and strongest growth driver in the business, delivering quarterly revenues in excess of $8 million, a 118% uplift on the first quarter. This is a clear indication that our infant nutrition strategy is well founded and being executed with precision alongside our key partners.”

Bubs ended the period with a cash position of $39.1 million after recording operating cash outflows of $12.5 million during the second quarter.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended BUBS AUST FPO. 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 Scott Phillips.

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