Flight Centre (ASX: FLT) Just Issued A Very Ugly Profit Downgrade

Flight Centre Travel Group Ltd (ASX: FLT) shares could be set to open lower this morning after the retail travel giant issued a profit downgrade.

Flight Centre was probably hoping the downgrade would be missed by investors as they sandwiched the announcement between the ANZAC day public holiday on Thursday and the weekend.

Strong Corporate Sales

In the announcement to the market, Flight Centre said sales were tracking strongly in the second half of the year with “sales tracking at record levels”, highlighting the strength of its corporate travel sales in the USA, UK and Asia markets.

Australian Leisure Soft

However, the company blamed lacklustre Australian leisure results missing expectations as the main reason for the profit downgrade. Flight Centre further pointed to challenging trading conditions over the past two years and said this included:

  • Deployment of a new sales system
  • Introducing a new wage model for its front-end sales staff
  • Consolidating its brand structures
  • Initiating an ongoing review of its shop network.

Flight Centre said while these changes have been embedded, the benefits from these initiatives are not yet being realised as it faces challenges of soft total transaction value (TTV) growth, increased costs and margin contraction within the leisure business.

“Other” Stuff…

Flight Centre also not so quietly let slip that losses in the “Other” segment of its accounts are expected to increase significantly during the second half of the year, offsetting the record profit contributions from the company’s international business.

The company said the movement will be driven by higher interest rates, increased global technology expenses, merger and acquisitions costs, additional transformation costs (consultant fees and redundancy payments), along with decreased interest income after paying the dividend.

Revised Guidance

Flight Centre almost concluded its spin with revised guidance for a profit before tax to be 15% lower at $335 million to $360 million on its previously guided forecast of between $390 million and $420 million.

However the company didn’t stop there with the spin, it tried to spin the revised forecast by shifting the goal posts on previously provided guidance by claiming the midpoint of the new range was a 10% decrease on its record $384.7 million underlying profit before tax in its 2018 financial year.

Rask Perspective

This profit downgrade reads as nothing but a huge spin job to me. Fair enough if Australian leisure results are soft. However, that doesn’t fully explain the revised profit downgrade. The way the announcement is made tries to make the soft Australian leisure sales as the main focal point of the downgrade while slipping in a bunch of other expenses which Flight Centre claimed was in “in addition to”, but could well turn out to be the main reason for the downgrade.

I don’t like the way this announcement has been framed, I feel Flight Centre could be more transparent with its investors.

Disclaimer: At the time of writing, Andrew does not own shares in any of the companies mentioned

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