Sour taste for Treasury investors

After the dramatic departure of the company’s CEO, Treasury Wine investors are wondering why it took so long to uncover inventory problems.

Treasury Wine Estates’ market disclosure practices could come under the microscope after the group removed Chief Executive David Dearie for failing to keep a close enough eye on the winemaker’s troubled US market.

Market chatter about the possibility of a class action against Treasury has become louder in the wake of Dearie's departure - with the company's market disclosure around its inventory levels a possible target. 

Pressure from investors seems to have played a part in the board’s sudden decision, two full months after yet another painful writedown on the wine business, to ask Dearie to leave.

It is not unusual for companies that have demonstrated a pattern of surprising the market with costly write-offs to face the wrath of investors via a legal challenge. Before the latest writedown in July, Treasury and former parent Foster’s had already written off nearly $3 billion associated with the Beringer and Southcorp businesses.

What some investors say is at issue is management’s role in the lead-up to the July 15 announcement to the market this year with the $155 million below-the-line writedown of excess US wine inventories for 2012-13.

News of the writedown sent TWE’s share price 12 per cent lower, possibly in reaction to the limited disclosure the wine giant had made to the market on its US inventory levels ahead of the writedown. CFO Mark Fleming resigned abruptly on June 5 to take a “career break”, TWE said.

TWE was, in effect, booking revenue and profit for selling excess US stock to distributors, only to take a below the line approach to later writing off the unsaleable stock by not registering the costs and associated losses on its P&L.  With a perfectly legal accounting manoeuvre, it enjoyed the earnings effect of pumping stock in the US but did not wear the loss on its balance sheet.

Analysts at Credit Suisse described TWE’s practice as a “channel stuffing” or “trade-loading” strategy – where Treasury shipped stock to its US distributors despite much of it not getting on-sold but booked the revenue from the sale.

Investors are wondering at what point senior management uncovered the scope of the inventory problems. Long-suffering investors, it seems, had had enough after years of over-optimism on the promise of the U.S. business.

Driving the pile-up of inventory was “commercial wine”, which must be consumed quickly or it goes off. Commercial wine retails for less than $12 a bottle and has a shelf life of 12 to 24 months, with the category making up 75 per cent of the group’s US revenue but just 35 per cent of its profit.

The departure of Dearie may have come at the behest of the substantial shareholders, who may have threatened a sell-down if management was not overhauled. The board did not announce it was reviewing Dearie’s performance, and has only just hired an executive search firm to identify a successor.

Substantial shareholders include The Capital Group, BlackRock, Scottish investment management firm Baillie Gifford & Co and mutual fund giant Fidelity Investments, according to Bloomberg data.

Certainly short-sellers have not been targeting the company. According to the latest data from ASIC, only 2.9 per cent of Treasury Wine Estates’ outstanding shares were held as short positions as of September 17. That level has barely budged since late July.

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