Blackmores Limited (ASX: BKL) was one of the most dominant shares on the local market in 2015, but investors have cooled on Blackmores' prospects so far this year.
During 2015, Blackmores recorded a huge lift in revenue while earnings also skyrocketed. In fact, so solid were Blackmores' results that the business even gave each of its staff members 44 additional days' salary as part of a profit-sharing scheme designed to align staff remuneration with shareholder benefits.
That growth was driven predominantly by sales to China. Indeed, Blackmores was one of the key beneficiaries of the rise of the "Daigou" market, which refers to a network of shopping agents who buy items in Australia before posting them to residents in China for a healthy profit. A2 Milk Company Ltd (Australia) (ASX: A2M) and Bellamy's Australia Ltd (ASX: BAL) have also been among the companies to benefit from this trend.
While Blackmores' share price hit an incredible high of $220.90 early in January – up from roughly $35 at the beginning of 2015 – the shares have nearly halved in price in the time since. They fell 4.3% on Monday to $123.35 and did recently trade for as little as $112.53.
What's gone wrong?
On 24 August, Blackmores announced a 115% increase in full-year net profit to $100 million, while group sales also rocketed 52% higher to $717 million. While those might seem like incredible results at first, investors were clearly disappointed by a slowdown in growth after the reporting period.
At the time, the company said (my emphasis): "The Australian wholesale market is volatile and has softened in recent weeks impacted by retailers destocking and some exporters changing the channels through which they acquire products. As a result, at this stage we expect our first quarter result to be down compared to the prior corresponding period."
Notably, management did express their confidence that sales would improve as the year progresses, but given the strong run-up in share price in the 18 months prior, a slowing growth rate was always going to get the market offside.
It's also possible that investors are reacting to challenges in the Korean market, combined with slow growth in the company's baby formula joint venture with Bega Cheese Ltd (ASX: BGA). Given the success enjoyed by both Bellamy's and a2 Milk Company in that market, it's likely that investors had high hopes for Blackmores' new infant formula line.
Blackmores' shares are certainly trading at a more attractive level now than they have done all year. However, an investment in Blackmores today isn't without risk: if sales growth does continue to slow, or if China's regulatory environment becomes more complex to navigate, Blackmores' shares could have further to fall. Still, they are worth a closer look by investors at today's price level.
