AVI earnings slip 7% on constrained consumer spending
The consumer brands group says trading environment remained difficult in the six months ended December 2018
As consumer confidence remained rooted at the 2018 low of 7-points in the fourth quarter of 2018, tough times lie ahead for SA’s food producers, according to analysts.
The flat consumer sentiment spells despair for consumers facing sectors because of deteriorating disposable income.
Consumer brands group AVI, the owner of household names such as Five Roses, Willards, Koffiehuis and Bakers, on Friday warned of flat interim sales and a 7% decline in headline earnings in the six months ended December 31 2018.
AVI shares were down 8.68% to R95.45 on Friday.
“The trading environment remained difficult with continued pressure on consumer spending resulting in sales volumes weakness in many of our businesses and was exacerbated by competitor discounting in some categories,” AVI said.
The company, whose fashion brands business includes Lacoste, Carvela, Spitz and Green Cross, said December sales volumes were lower than in 2017. It said operating profit was lower than the previous corresponding period “due to the impact of the lower volumes”.
AVI’s indifferent performance in the six months is indicative of the spot of bother that most companies in the consumer products sector find themselves.
Ron Klipin, a portfolio manager at Cratos Wealth, on Friday said food producers and processors were likely to be squeezed by retailers. “I reckon the retailers are going to benefit at the expense of food producers. It is only when food inflation creeps into the basket later this year that things should improve for food producers,” Klipin said.
He said AVI was, however, sheltered from the poor consumer spend because its businesses were exceptionally cash generative and its focus was on the upper end of the LSM markets which made them more resilient than many of its peers. In the year ended June 30 2018, all of AVI’s business units achieved operating profit growth, despite poor consumer demand and stiff competition.
“They have a portfolio of strong brands, and are not impacted to the same degree as most of their peers, who are dependent on soft commodities suffering from food deflation. Their food basket is very different from that of their major competitors. Their closest competitor is Rhodes Foods,” Klipin said.
Analyst Ian Cruickshanks on Friday said the outlook for consumer-focused firms looked bleak. “The consumer is still under a lot of pressure. The interest rates increased and most of the administrative prices are high. Unemployment is at unacceptably high levels,” Cruickshanks said.
He said he would be hesitant to buy shares in the consumer brands sector. “I would not be in a hurry to rush in, especially in the run-up to the elections. There is likely to be a lot of nervousness,” Cruickshanks said.
AVI, which intends to publish its interim results on March 11, said its headline earnings per share were expected to decrease by between 6% and 7%, translating to a decrease to between 303c per share and 306c per share, compared to 326.2c per share.
It said earnings per share were expected to decrease by between 6.5% and 7.5%, to a range between 302c per share and 305c per share.