A2 Milk (ASX:A2M) share price in danger after downgrading guidance again

The A2 Milk Company Ltd (ASX:A2M) share price could be in danger on Monday after it downgraded its guidance once again…

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The A2 Milk Company Ltd (ASX: A2M) share price could come under further pressure on Monday.

This follows the release of a trading update which reveals that it has downgraded its FY 2021 guidance yet again.

What did a2 Milk announce?

According to the release, trading dynamics in the China infant nutrition market have continued to be challenging for the company.

As a result, it has now become clear that the actions taken to address challenges in the daigou/reseller and CBEC channels will not result in sufficient improvement in pricing, sales and inventory levels to meet its downgraded guidance. Particularly after April sales were well below plan.

Comprehensive review

The release advises that the a2 Milk Board tasked management to undertake a comprehensive review of inventory in the trade. This work has indicated that the level of channel inventory is higher than had been anticipated.

As a result of the inventory review, it believes it is clear that the challenges in the daigou/reseller and CBEC channels have been exacerbated by excess inventory and difficulties with visibility.

In response to this, and in the interest of the long-term health of the a2 brand and the medium-term trading outlook of the business, management advised that it will be taking more aggressive actions to address excess inventory. This will impact FY 2021 revenue and EBITDA, and potentially also the first quarter of FY 2022.

What now?

Despite these short-term setbacks, management remains confident in the long-term opportunity that the infant nutrition market in China represents. Furthermore, it is determined to build on the strong position it has built within the key market over the past five years.

Nevertheless, management recognises that the China market and channel structure is changing rapidly. It has therefore commenced a comprehensive process to review its growth strategy and executional plans to respond to this new environment.

One person that won’t be sticking around to see this through is a2 Milk’s Chief Executive Officer of Asia Pacific, Peter Nathan. A separate announcement reveals that he has resigned from his role.

Capital management

One thing that may be supportive of the a2 Milk share price today is management’s plan to actively consider capital management initiatives.

This includes putting its vast cash balance to use with a potential share buy-back. Full details on its plans will be revealed with its full year results in August.

New guidance

The company is now targeting revenue for FY 2021 in the order of NZ$1.2 billion to NZ$1.25 billion.

And as for earnings, it is now expecting an earnings before interest, depreciation and amortisation (EBITDA) margin of 11% to 12% (excluding MVM transaction costs). The latter includes a stock provision of approximately NZ$80 million to NZ$90 million, which is in addition to the NZ$23 million stock provision recognised in its first half results.

This compares to its previously downgraded guidance of revenue of NZ$1.4 billion and an EBITDA margin of 24% to 26% (excluding MVM acquisition costs).

Looking ahead, management warned that it will take some time to rebalance inventory levels and restore channel health. As a result, an immediate recovery is not expected and a further update for FY 2022 will be provided in August.

The a2 Milk share price is down 40% since the start of the year.

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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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