Shares in junior chocolatier Yowie Group Ltd (ASX: YOW) dropped 13% this morning after the company released its June quarter activities report. The confusing format and mixed messages no doubt played a part.
First the highlights, then my take on why shares dived (all figures in US Dollars):
- Receipts from customers of $3 million – down on the two previous quarters, total yearly sales of $12.4 million
- Net operating cash outflows of $1.6 million, partly due to executive recruitment fees of $1.36 million, higher staff and marketing costs, and lower quarterly sales
- Yowie also spent $1 million on physical assets and intellectual property development
- New highly experienced CEO and Chief Operating Officer (COO) added to the business
- Improving digital metrics including Youtube views and website visits
- Raised capital of $23 million
- Cash at bank at end of quarter of $31 million
So What?
I found some of Yowie's statements confusing. For example: "The quarter delivered the third best quarter income received from sales behind December 2015 and March 2016 quarters".
As I interpret it, this means that the income that Yowie the company received from selling chocolate was its third best ever. Management seems to pin this on the fact that Easter and Christmas were in two prior periods which lead to elevated chocolate demand then, compared to now.
They also state that sales were lower due to "increased sales in previous two consecutive quarters following U.S. rollout to over 4,300 Walmart stores". The announcement is not clear at all, but I guess this could be due to the initial stocking of Walmart, which would have seen significant batch sales, with future sales made only as Walmart inventory runs down. Or, it could reflect slowing sales at Walmart, although Yowie notes that it continues to surpass Walmart's required product sales benchmarks.
Next was the statement: "The quarter delivered the second highest sales performance at 23% of total Yowie sales since inception, surpassed only by the peak selling March quarter with 26%." My understanding is that this refers to in-store Yowie sales, which is not money that the company receives directly. Consumers buy from retail stores, who buy chocolate from Yowie. This is why 'sales performance' is the second best quarter, compared to 'income received from sales', which is the third best quarter.
There are a couple of other statistics in there like, 'May was the third highest selling month', and 'June was the sixth consecutive month of sales over $1 million' that are a bit irrelevant and could make it look as though management is trying to assure investors that everything is alright.
I reckon the sales decline combined with the confusing statements are the main culprits behind today's decline in Yowie shares. After the well-publicised signing of new accounts and the sales performance of Yowie chocolates, the market is understandably surprised that sales have suffered a reversal.
Now What?
The guts of the announcement is that Yowie sold 2.5 times more chocolates than it did in the same quarter last year, and thanks to fundraising it now has a new highly experienced CEO and COO, as well as $31 million cash in the bank. Also in the update was mention of an increase in working capital to fund new chocolate production and the beginning of a new production line.
Although lower sales were not ideal given all the recent new accounts Yowie has signed, I would be inclined to trust management's word on this one and watch to see how sales progress in future quarters. After all, Easter is a traditional period of higher than average chocolate consumption. Investors should keep a closer eye on Yowie's sales figures and cash flows, and cross their fingers for more clarity in announcements from management.
