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Here’s why the A2 Milk (ASX:A2M) share price is tanking

The A2 Milk Company Ltd (ASX: A2M) share price is sinking today after management released updated FY21 guidance to the market.

At the time of writing, the A2 Milk share price has plunged more than 23% to $10.21 – meaning shares have nearly halved since hitting all-time highs in July.

A2 Milk shares have been in a trading halt since Thursday morning after management became aware of information that may require them to release an announcement to revise previously issued market guidance.

Updated FY21 guidance

Today, A2 Milk announced its second profit downgrade for FY21, citing weaker than expected sales in its daigou channel resulting from reduced international travel and international students.

Revenue guidance range for FY21 has been slashed to NZ$1.40 billion to NZ$1.55 billion, down from September guidance of NZ$1.80 billion to NZ$1.90 in billion.

Group revenue in FY20 was NZ$1.73 billion, therefore this revised FY21 guidance suggests a full-year revenue fall between 11% and 19%.

The group EBITDA margin for FY21 is expected to be between 26% and 29%, inferring an EBITDA range of NZ$403 million to NZ$449 million at the upper bound of revenue guidance or NZ$364 million to NZ$406 million at the lower bound of revenue guidance.

Group EBITDA in FY20 was $549 million. Based on FY21 guidance, this would infer a full-year EBITDA decrease between 18% to 33%.

COVID-19 takes its toll

In August, A2 Milk advised the market of supply-chain issues relating to its infant nutrition business. This was due to pantry destocking following the strong sales in 3Q20 and lower than anticipated sales to retail daigous in Australia as a result of reduced tourism from China and international students.

In September, updated guidance was released to the market as the company observed additional disruption to its corporate daigous, primarily due to the Stage 4 lockdown in Victoria.

The company expected the disruption to be temporary, however, “the acceleration of the recovery in recent weeks has been slower than we had previously expected”.

Furthermore, the difficulties facing the retail and corporate daigou channel has impacted its Cross Border E-Commerce Channel (CBEC), with sales below expectations.

With international travel to remain frozen between Australia and China for the foreseeable future, the company has materially lowered internal sales forecasts, given the strategically important role of the daigou and CBEC channels.

Light at the end of the tunnel

Despite the ongoing difficulties facing daigou and CBEC, the Mother & Baby Stores (MBS) channel has proved resilient. Forecasted revenue is expected to grow 40% in the first half of FY21, due to increases in both same-store sales and the number of new stores.

Market share has strengthened to 2.3%, in addition to internal research confirming increasingly strong brand health metrics and awareness within China.

Moreover, liquid milk continues to perform in Australia and the United States, with both businesses recording positive first-half growth.

A2 Milk reiterated its medium-term EBITDA margin target of 30% while noting “the Board considers the strength of the brand and the fundamentals of the business over the medium term remain sound”.

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At the time of publishing, Lachlan does not own shares in A2 Milk.

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