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Bubs shares lower despite reporting minimal coronavirus disruption

baby, milk, formula, bellamy's, bubs

The Bubs Australia Ltd (ASX: BUB) share price is down 1.38% so far today after the ASX formula maker delivered a first-half loss. Bubs did, however, report growing revenue, particularly from its infant formula products. 

Revenue increase driven by baby formula

Bubs reported gross revenue of $28.8 million, up 37% from the prior corresponding period (pcp). This was driven by strong performance of Bubs infant formula in all retail channels and regions. Infant formula gross revenue increased 77%, with direct sales to China doubling and gross margin increasing 5 basis points to 41%. Infant formula products deliver the highest margin within the group portfolio. 

Gross margin improvements have been driven by a number of factors including the strategic partnership with Tatura to produce Goat Infant Formula directly from fresh Australian milk. The Deloraine acquisition provided for an integrated supply chain which improved utilisation capacity. A greater proportion of high margin products and the deletion of loss-making fresh dairy products also assisted. Gross margin across the Bubs Group was 24% during the half. 

Goat milk powder delivered healthy revenue growth in the first half, with sales up 30% on the pcp. The entire Adult Dairy portfolio was, however, impeded by the loss-making deletion of yogurt products and disposal of Coach House Dairy brand assets. This was part of a deliberate strategy to reduce fresh dairy product lines due to poor profitability. 

Costs increase 

Expenses also rose during the half, with distribution costs up 16% to $0.79 million, equivalent to 3% of net revenue which is consistent with prior periods. Employee costs grew 33% to $2.85 million with headcount increasing 90% compared to 1H19 to build organisational capability to support continued growth. 

Marketing costs increased 269% to $4.81 million to support a strong domestic presence and build brand awareness in China. Administration costs declined 40% to $1.71 million due to reclassification as the result of AASB 16 adoption, effective cost management, and disposal of the Uphamgo joint venture. 

Bubs reported an overall statutory earnings before interest, tax, depreciation and amortisation (EBITDA) loss of $5.25 million, including non-cash expenses and expenses incurred outside of normal operations. This compares favourably to the loss of $8.52 million in the pcp. 

Regional performance

Domestic gross revenue increased 30% during the half, driven by strong penetration in Coles and Woolworths and the launch into Chemist Warehouse. 

First-half revenue for the corporate Daigou channel increased 52% and continues to grow month on month. 

Direct sales to China increased 19% while infant formula sales almost doubled, up 99%. This demonstrates strong traction with Chinese consumers following the establishment of partnerships with Alibaba TMall and Beingmate, and the deployment of additional marketing resources. 

Outlook

Bubs expects stronger demand for infant formula across all channels in 2H20. New distribution partnerships for Bubs products in Vietnam and Hong Kong will contribute to further growth in Southeast Asian markets in 1H20. Additionally, new markets and new product launches are expected to build on existing foundations to drive incremental revenue streams. 

Bubs has seen no diminution in demand and minimal disruption to the business due to the coronavirus outbreak. As a trusted international premium brand, Bubs believes it is well placed to appease Chinese parents’ heightened focus on food security. 

The company acknowledged that some retail channels normally fuelled by Chinese tourists and students have been impeded. However, from mid-February, there has been an increase in purchase activity in the corporate Daigou channel which is a combination of new customers and existing customers wanting to secure food supply given uncertain conditions. 

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Motley Fool contributor Kate O'Brien 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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