Why the a2 Milk (ASX:A2M) share price crashed 23% in May

It was another month to forget for a2 Milk shareholders…

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The A2 Milk Company Ltd (ASX: A2M) share price was a particularly poor performer in May.

During the month, the fresh milk and infant formula company’s shares lost a disappointing 23.5% of their value.

This means the a2 Milk share price is now down over 72% from its 52-week high.

Why did the a2 Milk share price crash lower in May?

The a2 Milk share price came under significant pressure last month following the release of yet another bitterly disappointing trading update.

That update revealed that trading conditions remain tough and that a collapse in demand had flooded the market with excess inventory. The latter led to a massive NZ$103 million to NZ$113 million inventory provision. That sure is a lot of infant formula tins being destroyed!

In light of this, management was forced to downgrade its FY 2021 guidance for a fourth time.

What is the company expecting?

Management revealed that it now expects to deliver revenue of NZ$1.2 billion to NZ$1.25 billion with EBITDA of NZ$132 million to NZ$150 million. This will mean a year on year reduction in EBITDA of 73% to 76%.

A2 Milk Company’s Managing Director and CEO, David Bortolussi commented: “While our third quarter trading was broadly in line with plan, it is clear that the actions taken to address challenges in the Daigou and CBEC channels will not result in sufficient improvement in pricing, sales and inventory levels to meet our previous guidance.”

“In the interest of the long-term health of our brand and the medium-term trading outlook of the business, more aggressive actions to address inventory will be taken which will impact FY21 revenue and EBITDA, and potentially 1Q22.”

And while Mr Bortolussi is positive on the future, the performance of the a2 Milk share price would indicate that the market isn’t as confident.

He said: “Despite these short-term setbacks, we are confident in the long-term potential for infant nutrition and other opportunities we have in China, and are determined to build on the strong position we have built in the market over the past five years.”

“We recognise that the China market and channel structure is changing rapidly and are commencing a comprehensive review of our growth strategy and executional plans to respond to this new environment.”

Shareholders will no doubt be hoping that this is the end of the downturn and that it is onwards and upwards for the a2 Milk share price from here. Time will tell whether that is the case.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia 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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