Nutritional supplements manufacturer Blackmores (ASX: BKL) shares dropped around 10% after announcing a 5% decrease in earnings per share. The share price drop is understandable for two reasons. Firstly, Blackmores is an illiquid stock, so it doesn't take too many buyers or sellers to cause a pronounced effect on the share price. Secondly, the company is priced for perfection. Trading on a multiple approaching 20 times earnings, this stock is expected to produce high growth numbers.
Blackmores did manage to growth revenue significantly with total sales up 30%, while earnings were pushed down by a number of factors. Higher interest payments, due to a $50 million increase in net debt for funding the recent BioCeuticals acquisition and higher inventory levels as the business expands in overseas markets both put pressure on earnings. However the most significant pressure came from the doubling in 'promotional and other rebates' expense. As management highlighted when releasing the interim results, the Australian retail environment has required additional investment in marketing to support its large stable of brands.
Although failing to give further details management also made mention of revised trading terms with key customers. Blackmores key customers include chemist banner owners Sigma Pharmaceutical (ASX: SIP) and Australian Pharmaceutical Industries (ASX: API) and major supermarket owners Wesfarmers (ASX: WES) and Woolworths (ASX: WOW). Given that even Terry Davis, CEO of Coca-Cola Amatil (ASX: CCL), is complaining about the market power of Coles and Woolies, it is perhaps not surprising Blackmores has had to increase its marketing commitment dramatically.
Foolish takeaway
As the share market continues its rally, it requires more work and becomes harder to find stocks that are not fully or overpriced. Be wary of paying a premium price for a stock in an attempt to ride the rally — if the company slips up, it is likely to fall hard.
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The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Tim McArthur does not own shares in any of the companies mentioned in this article.
