The A2 Milk Company Ltd (ASX: A2M) share price has jumped 10.94% to $5.88 today after announcing its first-half update.
Here’s why the A2 Milk share price soared and what it means for the business going forward.
A2M share price
Brighter outlook for the A2 Milk share price
The A2 Milk share price has been buoyed by better than expected sales numbers.
Revenue declined by just 2.6% on the prior year. When comparing the last half, revenue actually increased by 24.8%.
Management called out it expects growth for FY22. This is a big positive for A2 Milk after earnings fell 78% in FY21.
“The outlook for revenue in FY22 has improved since the start of the year… with growth now expected on 1H22 and for FY22 which is ahead of initial expectations due mainly to growth in China label and English label IMF”
Inventory back on track
The A2 Milk share price has been plagued by a myriad of issues, with inventory top of the list.
At the very beginning of the pandemic, customers and resellers ‘pantry-stocked’ products. This resulted in a temporary bump to A2 Milk profit and share price.
But as this inventory unwound, sales slowed resulting in earnings downgrades. It also highlighted that A2 Milk had less control over its supply than originally thought.
The opaque daigou channel – which refers to visitors, students and resellers who bring products back to China – literally had suitcases filled with formula tins.
Management had lost control of what and where inventory existed. Write-downs occurred as products expired, and a complete reset was required.
Fortunately, inventory looks to have been resolved, enabling management to focus on growing the business.
“The actions taken in 4Q21 and 1Q22 to address excess English label and China label IMF channel inventory respectively, are proving to be effective… targeted levels of channel inventory in English label and China label channels were achieved…”
Director appointment
While likely only a minor contributor to the A2 Milk share price rise, the company appointed Sandra Yu to its board.
Ms Yu has significant expertise in China as former head of Mead Johnson’s Greater China business, which includes infant formula brands such as Enfamil, Enfapro and Lactum.
Prior to her time at MJ, Ms Yu held roles at Unilever where she worked across Asia for 13 years.
What’s next for A2 Milk shares?
A2 Milk shares remain impacted by the rapidly changing Chinese IMF market.
But the business looks to be back on track in terms of sales and inventory. If it can continue this momentum going forward, it could be worth having another look at the business.
