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Why the a2 Milk Company (ASX:A2M) share price crashed 26% lower today

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The A2 Milk Company Ltd (ASX: A2M) share price has returned from its trading halt and crashed lower on Friday.

In afternoon trade the infant formula and fresh milk company’s shares dropped a disappointing 26% to $9.82.

Why is the a2 Milk share price crashing lower?

Investors have been selling the company’s shares this afternoon following the release of an update to its guidance for the first half and full year of FY 2021.

According to the release, the company has experienced a more significant and protracted disruption in the daigou channel than expected. Given that this channel represents a very large proportion of its infant nutrition sales in its ANZ business, this has had a negative impact on its sales.

In addition, while the daigou disruption was initially predominantly affecting infant nutrition sales, the company revealed that sales in other nutritionals segments have now also been impacted.

As a result, the recovery in recent weeks has been slower than management had previously expected and will lead to a2 Milk falling short of its guidance in FY 2021.

It commented: “Our internal sales forecasts for both the daigou and the CBEC channels for the remainder of FY21 are now materially lower.”

What about other parts of the business?

One area that continues to perform well its China label business. The company notes that sales have been very strong in the China Mother and Baby Store (MBS) channel and its market share continues to grow.

It expects MBS revenue growth of 40% over the prior corresponding period, with its market share increasing to 2.3% at the end of October.

In addition, its liquid milk businesses in Australia and the USA have performed well through the first half. Both businesses have recorded strong first half growth compared to the same period last year.

FY 2021 guidance.

In respect to the above, a2 Milk now expects to report first half revenue of NZ$670 million with an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 27%. This compares to its previous guidance of NZ$725 million to NZ$775 million.

For the full year, revenue is expected to be in the range of NZ$1.4 billion to NZ$1.55 billion with an EBITDA margin of 26% to 29%. As a comparison, its previous guidance for the full year was revenue in the range of NZ$1.8 billion to NZ$1.9 billion with an EBITDA margin of 31%.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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