The Treasury Wine Estates Ltd (ASX: TWE) share price is having a tough start to the day.
In morning trade, the wine giant's shares are down 8% to $11.77.
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Why is the Treasury Wine share price sinking?
Investors have been selling down the Treasury Wine share price on Thursday following the release of a trading update.
According to the release, consumer demand for luxury wine remains strong in all markets globally, with luxury sales in the Penfolds, Treasury Americas, and Treasury Premium Brands divisions in line with expectations.
Management notes that Penfolds continues to deliver strong momentum in building distribution and consumer demand across a number of key global markets.
However, one negative is that category consumption trends for entry-level premium wine in the United States remain challenging and have shown signs of further deterioration in recent months. Specifically, the 19 Crimes portfolio has continued to perform below expectations.
The sum of the above is that management expects group net sales revenue to decline 2% to 3% in FY 2023. This reflects declines in Treasury Americas and Treasury Premium Brands being partly offset by growth for Penfolds.
As for earnings, thanks to further margin expansion, the company is expecting earnings before interest, tax, SGARA and material items (EBITS) to grow 11% to 13% year over year to between $580 million to $590 million.
Though, it is worth noting that the top end of the range is a touch lower than Goldman Sachs' estimate of $592 million. This may explain some of the weakness in the Treasury Wine share price today.
Premium brands overhaul
In addition to its guidance, management also revealed that it is planning to implement a range of initiatives that are aimed at delivering greater operational and strategic flexibility to enable continued growth of its Premium and Luxury portfolios.
This includes adjusting the Treasury Premium Brands (TPB) operating model and organisational structure to align with the future scale of the business, in order to reduce fixed costs and increase focus on priority brands.
In addition, the company will undertake a review of the Commercial wine supply chain, particularly in Australia, with a focus on improving operational flexibility and reducing total network cost to improve cost of goods sold.
It will also explore the divestiture and/or rationalisation of selected assets, either individually or in combination.
Treasury Wine's CEO, Tim Ford, commented:
We continually and proactively assess our business performance, our structure and our cost base to make sure we're in the best position to continue to deliver on our premiumisation and growth strategy. With changing consumer preferences and a tightening economic environment in most major markets, we're taking the opportunity to make changes in our business now, so we have increased flexibility in the future to continue to grow our Premium and Luxury portfolios.
