A profit warning by Australia’s Treasury Wine Estates triggered a 25% tumble in the firm’s shares on Wednesday as it announced a review of its U.S. operations amid stiff competition and changes to its Americas management team.
The owner of the Penfolds wine label slashed its earnings outlook for 2020 late on Tuesday, saying business would be affected by aggressive discounting and higher promotional spending in the U.S., which it says 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 it now expects its core earnings to grow about 5-10% for 2020, compared with an earlier range of 15% to 20%. The shares plummeted as low as A$12.495 on Wednesday, touching their lowest level since August 2017.
At least two brokerages – JP Morgan and Credit Suisse – downgraded their ratings for Treasury, citing continuing headwinds as the company’s guidance did 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 August due to robust demand for its premium wines there.
“Despite the setback in the U.S. this half … we remain confident … to deliver growth in this business in the foreseeable future,” Tim Ford, Chief Operating Officer, and incoming Chief Executive Officer said during an analyst call. Treasury ruled out an exit from the U.S. market.
Treasury in December 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.
Management said during the call that its guidance did not take into account any potential impact from the coronavirus outbreak in China, as it would be “premature” to do so at this point of time.
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 strained profits and a troubled foray into the U.S. wine market.
Clarke has since then led the company through a phase of rapid growth in China, and a major acquisition of the U.S. assets of the world’s largest spirits group Diageo Plc
The company had 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.
While Treasury’s vineyards remained unscathed from Australia’s monster fires, some of its suppliers in the Adelaide Hills were not so lucky. Higher temperatures and water prices in the aftermath of the fires would likely mean production costs in Australia would rise.
(Content and photos syndicated via Reuters)