A profit warning by Australia's Treasury Wine Estates triggered a 25% tumble in the firm's shares on Wednesday January 29 as it announced a review of its US operations amid stiff competition, a wine glut and unforeseen management changes.
The owner of the Penfolds wine label slashed its earnings outlook for 2020 late on Tuesday January 28, saying business will be affected by aggressive discounting and higher promotional spending in the United States, which it said has been flooded with cheaper wine.
The Americas region accounted for about 40% of Treasury's annual revenue in financial year 2019.
In a statement, Treasury said that it now expects its core earnings to grow approximately 5%-10% for 2020, compared with an earlier range of 15% to 20%. The shares plummeted as low as A$12.48 on January 29, touching their lowest level since August 2017.
At least three brokerages - JP Morgan, Credit Suisse and UBS - downgraded their ratings for Treasury, citing continuing headwinds as the company's guidance does not factor in the possibility of weaker demand due to risks from the outbreak of the new coronavirus in China.
China is one of Treasury's biggest markets, with the company's latest annual profit scaling a record in June due to robust demand for its premium wines there.
The company said that its new guidance does not take into account any potential coronavirus impact, as it would be "premature" to do so.
"Despite the setback in the US this half...we remain confident...to deliver growth in this business in the foreseeable future," Tim Ford, chief operating officer and incoming CEO, said during an analyst call. Treasury ruled out an exit from the US market.
In December, Treasury announced the appointment of Ben Dollard as president of its operations in the Americas, replacing Angus McPherson.
The change came after McPherson notified the company he was unable to relocate to the United States as planned due to unforeseen personal circumstances.
Deep discounting had been an issue for Treasury in 2014 when outgoing CEO Michael Clarke was brought in to rethink the company's strategy and tasked with turning around fortunes after troubles in the US wine market.
Clarke has since then led the company through a phase of rapid growth in China and a major acquisition of the US assets of the world's largest spirits group Diageo Plc in 2016.
"No Surprise"
"It is perhaps no surprise that the profit weakness was in the Americas business," said Nigel Stevenson, an analyst at GMT Research, which in August said that Treasury may have inflated profits following its purchase of most of Diageo's wine business.
Last year, the Hong Kong-based research house argued that Treasury might have used acquisition accounting to boost profits by approximately A$300 million ($205 million), which the company rejected.
"Profitability in the Americas business may now be declining to more normal levels as the benefits of the acquisition wind down," Stevenson told Reuters in e-mailed remarks.
Treasury also warned that drought, heat and fires in Australia could drive up the cost of its 2020 Australian vintage wine, which is currently in harvest.
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