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Why the Freedom Foods share price crashed 19% lower today

The Freedom Foods Group Ltd (ASX: FNP) share price is on course to end the week on a very disappointing note.

At the time of writing the diversified food company’s shares are down 15% to $3.68.

At one stage today they dropped 19% to a multi-year low of $3.53.

Why is the Freedom Foods share price crashing lower?

Investors have been selling Freedom Foods’ shares following the release of a trading update this morning.

That update revealed various impacts from the pandemic, both positive and negative, across its business.

During March and April, the company’s Australian retail grocery channel experienced stronger than expected demand. This was driven by consumer spending shifting to this channel during lockdown. Sales in the channel have now normalised.

Also performing positively was its dairy nutritionals business. Demand for lactoferrin remains strong and its performance is in line with expectations. Pleasingly, 80% of FY 2021 output is already contracted.

Things were not so positive for the out of home channel in Australia. Sales in this high margin channel were just 25% of its pre-pandemic expectations in April. This was due to distributors destocking because of reduced demand from widespread outlet closures and restricted trading. The channel is recovering slowly and in May its sales have recovered to 50% of pre-pandemic expectations.

It has been a similar story in the industrial channel. This channel produces cream products which are used in food service and hospitality industries. Sales in April were approximately 55% of pre-pandemic expectations and are forecast to be 45% in May.

Finally, its export channel has underperformed during the pandemic. Sales to China are down 35% compared to expectations. However, management notes that the channel has started to recover now.

What does this add up to?

The sum of the above is a much weaker second half result. And given the importance of its second half to its overall result, its full year result looks set to fall well short of expectations.

Management explained: “Typically, the second half of the financial year is a significant sales and margin contributor to the overall result: normally the second half contributes over 60% of full year operating EBDITA. For FY2020, the combination of the level of sales, changed sales mix from March to June, the impact of doubtful debts and an unrecovered higher seasonal milk pricing will materially impact the second half operating EBDITA relative to pre COVID 19 plans.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Freedom Foods Group Limited. 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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