Remy Plans Recovery as Chinese Cognac Slump Hurts Profit

Remy Cointreau SA, the maker of Remy Martin cognac, plans to return to earnings growth in the current fiscal year after Chinese customers’ cutbacks on purchases of the drink caused annual profit to plunge 39 percent.

Remy “can set an objective of achieving organic growth in sales and current operating profit in 2014-15,” the Paris-based liqueur producer said today in a statement.

Sales of Remy Martin have been depressed by government crackdowns on extravagant spending in China, one of the spirit’s largest markets. Adjusted operating profit in the 12 months through March fell to 150.2 million euros ($204.3 million) from 245.4 million euros a year earlier.

“The headlines from Remy’s fiscal 2014 results were always going to be terrible,” Jonathan Fyfe, an analyst at Mirabaud Securities in London, wrote in a report to clients. “All that matters at this point is outlook.” Mirabaud expects a “technical bounce in profit in 2015 but overall sees no reason to change our core view that Remy’s growth outlook has been rebased.”

The earnings decline reported today was at the high end of a 35 percent to 40 percent contraction that Remy predicted in April, when it posted sales that fell further than analysts had estimated. On an organic basis, which excludes acquisitions, disposals and currency shifts, profit decreased 41 percent, steeper than the 35 percent median drop estimated by six analysts.

Stock Declines

Remy fell as much as 3.3 percent, the biggest intraday decline since May 20, and was trading down 0.3 percent at 67.38 euros as of 9:58 a.m. in Paris.

Under President Xi Jinping’s leadership, Chinese authorities have been scaling back spending on expensive gift-giving and luxury banquets as part of a drive to halt corruption. The decline in demand at Remy, which also sells Cointreau liquor, Mount Gay rum and Bruichladdich whisky, has led to a 21 percent slide in the French company’s stock price in the last year.

Amid an uncertain environment due to “a transforming Chinese spirits market and a weak macro-economy in western Europe,” Remy will continue to invest in marketing as it maintains a “high value strategy,” the company said.

Larger competitor Pernod Ricard SA, the maker of Martell cognac, reiterated yesterday at a conference in Cork, Ireland, that it doesn’t expect an improvement in underlying trends in China this calendar year. Pernod has reacted to the slowdown in the country by creating less expensive variants of its spirits.

“There is a big structural shift that happened in China that started a couple of years ago,” Alexandre Ricard, the company’s incoming chief executive officer, told investors yesterday. “China is becoming a normal emerging market.”

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