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  • The a2 Milk Company (A2M) has significantly downgraded its revenue and earnings guidance for the current financial year due to pandemic headwinds
  • The company had revised its guidance as recently as late September, but those figures have been substantially revised down
  • Even the best-case scenario — taking the lowest figure ($1.8 billion) from the previous guidance and delivering the higher figure ($1.55 billion) of the new guidance — would mark a 13.9 per cent downgrade in projected yearly revenue
  • The company attributes the downgrade to a raft of market forces as global economies are disrupted amid the COVID-19 pandemic
  • A downturn in demand from daigou shoppers has made the most significant dent in a2's bottom line
  • A number of other sales metrics are showing growth compared to last year, so it's not entirely bad news — though growth has been slowed across those sectors too
  • The a2 Milk Company is down 24.06 per cent, trading for $10.09

The a2 Milk Company (A2M) has significantly downgraded its revenue and earnings guidance for the current financial year due to pandemic headwinds.

Big downgrade

The company had revised its guidance as recently as late September, projecting group revenue for the first half of FY21 to land between $725 million and $775 million, and whole-year revenue of $1.8 billion to $1.9 billion.

Those figures have been revised down substantially, with first-half revenue of $670 million and full-year numbers in the range of $1.4 billion to $1.55 billion.

Even the best case scenario — taking the lowest figure ($1.8 billion) from the previous guidance and delivering the higher figure ($1.55 billion) of the new guidance — would mark a 13.9 per cent downgrade in projected yearly revenue.

Yearly earnings before interest, tax, depreciation and amortisation (EBITDA) will also return a lower margin than previously projected.

Group EBITDA margins are now estimated at around 26 to 29 per cent, down from 31 per cent under the previous guidance, trimming the potential profits for the year.

Disrupted markets

The company attributes the downgrade to a raft of market forces as global economies are disrupted amid the COVID-19 pandemic.

a2 had predicted a bounce-back in sales to daigou channels (people re-selling goods back into the Chinese market) in the back half of FY21, but that resurgence hasn't materialised.

The company attributes this largely to a lack of travel from China, with the downturn being deeper and more protracted than previously expected.

The cross-border eCommerce (CBEC) channel has also suffered — in part due to its interdependency with the daigou channel.

Daigou shoppers play an important role in stimulating demand for the CBEC channel, so both avenues to sales have suffered as a result of the diagou downturn.

While the 11/11 online sales still demonstrated year-on-year growth, that growth was smaller than predicted.

Outlook

While there's no real way to spin the guidance downgrade into good news, there are still segments of the a2 business which are growing, albeit slower than predicted.

The company's liquid milk brands in Australia and the U.S. have shown solid growth compared to the same period last year.

Revenue from mother and baby stores (MBS) in China has also grown, with first-half revenue growth of over 40 per cent compared to the prior corresponding period.

Brand surveys in the Chinese market also show growth in brand awareness and intention to buy, which bodes well for future expansion.

The company remains confident in its brand and will continue its marketing focus in the back half of the financial year.

The a2 Milk Company is down 24.06 per cent, trading for $10.09 at 1:53 pm AEDT.

A2M by the numbers
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