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Treasury Wine shares tumble 25% after profit warning

Penfolds producer says poor performance of its US division to blame for severe cut in profit forecasts…

Australian wine giant Treasury Wine Estates – which owns the Penfolds and Wolf Blass wine brands – has seen a 25% fall in its share price after issuing a downwards change to its earnings outlook for 2020.

Treasury issued the warning following a review of its operations in America where a competitive market, oversupply of wine and unforeseen management changes within its business have been cited as reasons.

‘A loss of execution momentum, contributed to by unforeseen changes in regional management, was exacerbated by the persistence of challenging conditions in the US wine market which accelerated in Q2 post vintage,’ said Treasury in a statement.

Aggressive discounting in the US market, which has been flooded with cheap wine, and the resultant higher promotional spending has hit the business hard. The Americas accounted for around 40% of Treasury’s annual revenue in 2019.

‘Despite the setback in the US this half, we remain confident to deliver growth in this business in the foreseeable future,’ said Chief Operating Officer and incoming CEO Tim Ford. A departure from the US market was ruled out.

Treasury now expects its core earnings to grow about 5-10% in 2020, compared with an earlier range of 15% to 20%. Its shares fell to their lowest level since August 2017 as a result of the statement.

China crisis

A number of brokerages – including JP Morgan, Credit Suisse and UBS – have downgraded their ratings for Treasury amid concerns of weaker demand for wine in China due to risks from the recent outbreak of the coronavirus.

China is one of Treasury’s biggest markets – especially in the premium sector – and its new earnings outlook does not factor in any potential disruption from the coronavirus as it would be ‘premature’ to do so at this stage.

Treasury has also warned that the drought and bush fires in Australia could drive up the cost of its Australian wine produced during the 2020 vintage, which is currently being harvested.

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