Are A2 Milk shares ‘turning a corner’ on the daigou debacle?

The A2 Milk Company Ltd (ASX: A2M) share price has jumped almost 15% since the company told investors yesterday how it performed in FY22 and made comments about how its recovery is going in China.

Readers may recall that FY21 was impacted heavily by a reduction in demand from China and daigou shoppers (who buy and export luxury goods to customers in China for a profit). This also had a painful impact on inventory, which then impacted product freshness and product margins.

In FY21, A2 Milk reported that infant nutrition revenue in ANZ decreased 52.1%, which it partly attributed to the unwinding of pantry stocking, as well as COVID-19 restrictions.

But, FY22 appeared to demonstrate some return of demand and growth.

Growth returns

A2 Milk reported that total revenue grew by 19.8%, while China label and English label infant formula sales grew 12.2% and 11.6%, respectively.

Earnings per share (EPS) rose 51.8% to 16.5 cents, while the company also announced a $150 million share buyback.

It said that brand health metrics reached new highs across the business, with the total A2 Milk infant formula spontaneous brand awareness in China increasing “significantly” from 16% to 21% after a 36.3% increase in marketing investment.

The company also achieved a record market share in Chinese infant formula in mother and baby stores and domestic online, with English label infant formula market share in cross-border e-commerce (CBEC) increasing in the second half of FY22. A2 Milk also said that it achieved record market shares in Australia and the USA milk division.

A2 Milk said there was a “deliberate shift” of English label infant formula to more “transparent, performance-based and exclusive partners”. This shift is “progressing well”, with “significantly improved share of voice in the daigou channel”.

A2 Milk managing director and CEO and David Bortolussi said:

We remain committed to the daigou channel and have increased our direct engagement and marketing support with more daigou supporting the brand.

The Age reported that Bortolussi also said the slowed rate of decline in the daigou channel was proof it was “turning a corner”, and he “absolutely” wanted the channel to bounce back to its better days like before COVID-19 hit. He also said:

The daigou channel, through one-to-one word of mouth recommendation, is a really powerful form of new user recruitment and communicating our brand messaging through the market more generally. So, it’s a really important and effective channel we want to support.

A2 Milk also said that within its English label infant formula channels, it has seen a mix shift from daigou to CBEC and offline to online (O2O).

However, the company acknowledged that it lost market share in the daigou channel during the year, but the rate of decline slowed during the second half after a change of distribution markets.

Kantar data indicated that consumer sales in the daigou channel were down 17% in FY22 and that the company’s daigou market share declined to 18.7% at the end of June 2022.

Outlook

The A2 Milk share price can be impacted by what investors are expecting from the company.

Management said that China label infant formula sales are expected to be up in FY23, with “significant growth” in sales in the first half of FY23. At this stage, sales in the second half of FY23 are expected to be “impacted” by the transition to the company’s new pending GB registration.

English label infant formula sales are expected to be “up” in FY23, with FY23 first-half sales expected to be “broadly in line” with the second half of FY22 due to the impact of managing the transition to the refreshed a2 Platinum range.

Overall, the company is expecting high single-digit revenue growth in FY23. It’s expecting earnings before interest, tax, depreciation and amortisation (EBITDA) growth in FY23, with a “modest” improvement in the EBITDA margin, despite increasing its marketing spending.

A2 Milk share price snapshot

Despite the big rise over the last two days (it’s currently up another 4.17% today to $5.63), the A2 Milk share price is virtually flat over the last six months.

The post Are A2 Milk shares ‘turning a corner’ on the daigou debacle? appeared first on The Motley Fool Australia.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended A2 Milk. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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