Remy Cointreau SA fell the most in almost five years after the maker of Remy Martin cognac said it expects a “substantial double-digit” drop in annual earnings amid a Chinese crackdown on lavish spending at official events.
The shares slumped as much as 12 percent to 63.15 euros, with the Paris-based company saying that the business climate will be less favorable in the second half of the year, causing analysts to reduce profit estimates.
China’s new government pledged a year ago to clamp down on alcohol-fueled banquets and receptions, prime cognac purchasing and drinking occasions. That’s left retailers with high levels of unsold inventory, hurting profitability for Remy and competitors as consumers switch to cheaper cognacs than bottles that can sell for thousands of dollars.
“This outlook is definitely worse than expected,” said Trevor Stirling, an analyst at Sanford C. Bernstein in London. “I don’t think anyone was expecting a rebound in China, but it’s unclear how much of this negativity is down to destocking and what’s down to a real decline in underlying demand for cognac in China. That’s a big source of uncertainty.”
Adjusted operating profit for the year through March could fall 20 percent and “perhaps more,” Chief Executive Officer Frederic Pflanz said on a conference call today. Kepler Cheuvreux analyst Laetitia Delaye said she expects to cut her per-share earnings estimates by 20 percent for this year and 25 percent for fiscal 2015.
“Clearly the problem in China weighs on our outlook,” Pflanz said. “There’s been no change in the last six months and we don’t expect any short-term change” in government policy.
Remy said it won’t cut prices in China to offset the slump in demand, and is focused on selling premium spirits.
The shares were down 12 percent to 63.51 euros at 12:51 p.m., the steepest drop in the Euro Stoxx 600 Index. Pernod fell as much as 3 percent and Diageo Plc as much as 1.1 percent.
Pernod said Oct. 24 that sales of its Martell cognac brand fell 12 percent in the fiscal first quarter, and that the timing of any recovery in China was “unclear.”
Remy’s first-half adjusted operating profit fell 7.3 percent on an organic basis, totaling 132.7 million euros ($180 million), the company also said today. Organic profit at its cognac unit declined 12 percent to 116 million euros.
Remy said it remains confident in its medium and long-term outlook in Asia, “particularly in China, where its development potential remains unaffected.”
Profit at its liqueurs and spirits unit rose 2.6 percent in the first half as Remy increased sales of Cointreau and Mount Gay rum, while maintaining the pace of marketing investment.
Sales declined 3.6 percent on an organic basis to 558 million euros in the six months through September, while net income fell 20 percent to 69.3 million euros.