Wine mystery doesn't hold water

Remember the Brambles lost pallets affair and the case of the missing Aristocrat poker machines (later found in a South American warehouse)? We now have the great Treasury Wine Estates mystery - millions of litres of wine thought to have been sold to US consumers have miraculously appeared in warehouses and supermarket shelves.

The real mystery is not how they came to be there or even why $35 million (yes, that's $35 million) of wine will be flushed down the toilet, it's why we only heard about it this week.

How do you misplace that much wine without management knowing? Surely the chief bean counter should know, but he was quietly replaced last month with no explanation.

The idea of supply chain management is not new and central to its purpose is for suppliers of product - such as wine or dresses or ovens or cars - to know how much inventory has been sold.

And here is another mystery: How do you convince investors that the company is a growth stock commanding a nose-bleeding price-earnings ratio of 25 times when all the while it was losing market share and volumes in the US have been shrinking?

The Kool-Aid over at Treasury Wine must be laced with some of the company's stiffest product.

The stock got beaten around on Monday following the astounding announcement that excess inventory would cost the company $160 million in provisions and wipe $30 million off earnings in the 2014 year.

The slump continued on Tuesday as analysts took off their gloves, having realised they had been victims of a snow job.

Few agreed with Treasury Wine management's assessment that these inventory write-downs had cleared the decks and laid the foundations for growth. JP Morgan headlined its report, "The cockroach theory strikes again", suggesting there are more troubles than the one just announced, while Credit Suisse titled its note, "Investor confidence undermined".

At least no one could accuse Treasury Wine of selectively leaking even a drop of information to investors before this week's announcement - not surprising, really, given it appears management didn't know either. This is even more unforgivable.

Based on this week's news, even at Tuesday's close of $4.80 the shares have further to fall. It has five large shareholders on the register and if one breaks ranks and quits the register, Treasury Wine could go into free fall.

A couple of analysts have been sceptical about this company for a while, including Credit Suisse's Larry Gandler and Macquarie's Greg Dring.

Dring said the problems confronting the company have not changed in a decade - that US consumers are purchasing fewer Treasury Wine brands each year. Sales volumes have declined from 18 million cases in 2008 to 15.2 million in 2013, and this is expected to fall to 13.8 million in the 2014 financial year.

Dring puts an outperform on the stock - his theory being the latest problems will trigger the need to spin off the valuable Penfolds wine business.

Gandler says the management and its board seemed unwilling to recognise the underlying reasons as to how the company arrived at this situation.

Where the company said on Monday that the discovery of inventory was the result of improvement in distributor logistics models, Gandler notes: "No other listed alcoholic beverage company had been caught off guard by new logistics models from a wholesaler industry that has basically been doing the same thing since the 1930s."