Blackmores profit falls 10%

Vitamins and supplements supplier hit by falling Australian margins

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published August 28, 2013 9:44 am AEST

Increased competition and structural changes in the pharmacy sector have hit Blackmores' (ASX:BKL) annual results, with net profit after tax falling 10% to $25 million.

Despite strong sales results of $327 million, up 25% over the previous financial year, Blackmores was hit by a decline in its Australian margins. Net debt more than doubled to $69 million, resulting in higher interest expense, and interest cover dropping from 15.2 times to 8.1 times.

Smaller community pharmacies are declining as larger discount 'warehouse' style pharmacies pop up, intense competition from other brands such as Swisse, and pressure from the big supermarket retailers Woolworths (ASX:WOW), Coles – owned by Wesfarmers (ASX:WES) and Metcash (ASX:MTS) backed IGA stores are all playing a part in cutting Blackmores margins.

And Blackmores says these market dynamics are likely to persist in the coming year, making its strategy of expanding into Asian markets all the more important. Despite Blackmores declaring a final dividend of 83 cents, fully franked, as a vote of confidence in the company's future, this is a company under pressure, and will have to run hard just to stand still.

Asia remains the key to future growth, as the Australian market goes through structural changes. Blackmores has established operations in China, Thailand, Malaysia, Hong Kong, Singapore and Taiwan, which all achieved record sales. During the year Blackmores launched in Macau and China, and expects to see sales grow in the coming year.

Foolish takeaway

Blackmores is a company under pressure to revive its profit growth, despite strong sales growth. The acquisition of BioCeuticals, a practitioner-only supplements supplier, is expected to continue to provide a positive contribution to earnings, and Blackmores expects an improvement in profit in 2014. Foolish investors may want to wait and see how the year ahead pans out, before making an investment in Blackmores.

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Motley Fool writer/analyst Mike King owns shares in Woolworths.

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