The Bubs Australia Ltd (ASX: BUB) share price is ending the week deep in the red.
In morning trade, the embattled infant formula company's shares are down 11% to 16 cents.
Why is the Bubs share price sinking?
Investors have been hitting the sell button today after the company revealed just how bad things got for the business in China under the leadership of its previous CEO and Chair.
According to the release, full-year revenue in China is expected to be at the low end of the previous forecast range of between $13.5 million and $13.8 million. This will be a whopping ~75% reduction on FY 2022's revenue of $53.6 million.
Bubs' new management team blamed this on exclusive China distribution arrangements with entities affiliated with AZ Global and Willis Trading, which are below expectations and continue to disappoint.
It is unclear whether FY 2022's China revenue was boosted by the same channel stuffing activities that contributed to the recent downfall of BWX. However, Bubs revealed that it understands there is more than 5 years of Bubs Supreme finished goods inventory held in multiple warehouses, based on the current rate of sale.
In addition, the company has stated that AZ Global and Willis Trading owe $5.65 million for finished goods that were delivered. Bubs also now holds significant amounts of bulk raw material that was purchased to meet its supply obligations under the agreement with AZ Global.
Unsurprisingly, given the state of its inventory position, the company expects to make a significant non-cash impairment of inventory with its FY 2023 results. At present, it estimates that this will be in the region of $20 million to $25 million.
SAMR plans scrapped
Bubs has decided to scrap its joint venture plans with Zhitong Health Technology and has withdrawn its SAMR application for direct access to China's infant formula market.
Instead, the company's new management team will now revisit its own resubmission and registration application under SAMR in respect of three slots for which nomination rights are held by the Australian Deloraine facility.
Commenting on the mess that former leaders Kristy Carr and Dennis Lin left behind, acting CEO Richard Paine said:
It is clear that the exclusive distribution agreement with AZ Global has not delivered for shareholders. Bubs will take a more strategic approach to its distribution in China going forward. Our brand is well respected in this critical market, and we need to progress with a multi-channel strategy supported by professional and experienced trade partners on the ground who can deliver us real time, valuable market insights. Bubs has a great opportunity to grow our brand presence in China, alongside the US and other international markets. We look forward to providing a broader update on our strategic review shortly.
