Australian Pharmaceuticals Industries Ltd (ASX: API) shares hit a 52-week low of $1.33 in early morning trade, following the company's disappointing market update released yesterday. API shares have now fallen 18.50% since January 5.
API stated full year net profit after tax (NPAT) is forecast to be "marginally above" its FY2017 result, though half year performance is expected to be 9% lower than the prior corresponding period.
All-important like-for-like sales declined 2.4% across the API network for the first half of FY2018, as the company's Priceline Pharmacy network experienced suppressed retail conditions until late in the Christmas trading period.
With consumer spending tight in Australia due to high household debt and slow wage growth, I would be surprised to see API's sales conditions significantly improve in the near term. Rather, due to intense competition from the likes of Chemist Warehouse and the recent local launch of Amazon, I expect API's issues to worsen.
I have previously written that the market has overplayed the impact Amazon will have on certain retailers, however I believe hair care, skincare, beauty products and health supplements are all suited to sell online. Amazon.com.au already has a large Health & Beauty sales category, immediately positioned at an advantage without the large overheads of operating bricks and mortar stores.
API's balance sheet as of 31 August 2017 shows a company of sound financial position; sufficient cash and a relatively small amount of interest-bearing debt. API also generated significant cash from operating activities, so cash flow wasn't a problem during the full year period either.
What I am more concerned about is the company's future revenue and earnings in an environment of weak retail spending, intensifying competition and online disruption. I believe these three major factors will mean decreasing store sales for API and tighter margins, likely translating into lower earnings.
For the year ended 31 August 2017, API's statutory net profit margin was 1.29%, down from 1.35% the previous year. Given the company is already suffering from declining sales, margins may have to be cut further in order to maintain market position.
API shares are relatively cheap, currently trading for 13x trailing earnings after a 30% fall in price over the last year, though I still won't be looking to invest until Australian consumer spending shows strong signs of improvement. Even then, I would have to see API focus more intently on conducting business online and look to streamline its store network.
