Bubs Australia Ltd (ASX: BUB) is looking to follow in the footsteps of Blackmores Limited (ASX: BKL) as the infant formula company expands into the vitamins sector. What could this mean for the Bubs share price?
Expanding into vitamins
In an announcement to the market earlier this week, Bubs informed investors that the company will be entering into the vitamin and mineral supplements (VMS) category. Through an agreement with Chemist Warehouse, the company will be launching a new VitaBubs infant and children’s VMS range.
According to the company’s management, expanding into the lucrative VMS sector will allow Bubs to leverage its unique brand awareness, consumer base and marketing coverage. By tapping into Australia’s $2.3 billion VMS sector, Bubs will be able to maintain its strategy of evolving into high margin categories. In addition, the company’s launch partner, Chemist Warehouse, accounts for more than 50% of the VMS products retailed in Australia.
Bubs will be launching 40 retail products into the VMS sector that will be available in both child-friendly chewable tablets and single-serve powder sachets. The product range will tailor for new-borns through to 12-year-olds and cater for various growth and development matters.
How has Bubs performed?
In addition to its announcement to expand into the VMS sector, Bubs also released its activities report for the fourth quarter of FY20. The report indicated that the core Bubs range of goats milk infant formula products had seen a slowdown with Australian sales falling 15% during the June quarter. The fall in demand was attributed to disruptions in the logistics of the daigou trade into China as well as panic buying in the months prior sapping sales.
Despite the fall in Australian sales, the company reported a 32% increase in gross revenue of $62 million for FY20. In addition, Bubs saw China Direct sales for the fourth quarter increase 26% on the prior corresponding period. Although the company reported a negative operating cash flow of $6.9 million for the quarter, Bubs assured shareholders of its robust balance sheet, boasting $26 million in cash reserves.
Will the Bubs share price become the next Blackmores?
In my opinion, Bubs is still in the early stage of expansion in its core products of goats milk infant formula. This is because revenue is still driven by the company’s expansion into different markets, different sectors and higher margin products. By moving into the VMS sector, the company is following its growth blueprint, however it is yet to produce consistent operating and free cashflow.
Instead of jumping the gun and buying in at today’s Bubs share price, I think a more prudent strategy would be to wait until the company reports its full-year results or perhaps take a longer view and wait for the company to show signs of sustainable cash flows.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Blackmores Limited and 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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