Blackmores: Interim result 2017

A year ago, Blackmores seemed to have a bigger fan following than Adele. Not anymore. The stock has lost half its value over the past year, with the vitamin and supplement maker recording a difficult six months to December: sales fell 6% to $322m, with net revenue down 8% to $262m after removing promotional rebates.

Sales in Australia fell 31% to $158m. ‘Chinese-influenced sales through Australian retailers remain down as buying patterns evolve,' said management.

This is a polite way of saying the hordes of Chinese entrepreneurs who were buying every bottle they could get their hands on and shipping it back to China – where it could be sold for double or triple the price – have taken a breather. Regulatory uncertainty, rising competition, and subdued demand left many of these buyers holding too much stock and worse-off financially.

International sales picked up some of the slack, however. Direct sales to China rose a hearty 92% to $64m. Other Asian sales were up 16%, with Taiwan, Hong Kong, and Singapore singled out as being particularly good markets.

Hail the practitioners

The company's BioCeuticals practitioner-only brand, which was acquired in 2012, also had a good year of growth, with sales up 54%. Excluding the recent acquisition of Global Therapeutics, sales were still up a healthy 19%.

Unfortunately, a combination of lower overall volumes and higher ingredient costs meant that earnings before interest and tax (EBIT) fell 40%, with the margin declining from 24.3% 15.9%. Ouch.

Vitamin manufacturing has significant economies of scale because a large proportion of costs are fixed factory expenses – that worked wonders as Blackmores was growing, with margins expanding considerably, but this period is a reminder that losses can be supercharged as well.

Net debt rose from $18m to $83m, which was attributed to higher working capital needs, a record tax bill and higher cash payments to suppliers. Operating profits still cover the company's interest expense some 18 times over, so we don't expect the debt to be a problem unless sales drop materially, but it does increase risk.

The stock is down 22% since we downgraded it to Sell in Blackmores' bitter pill from 23 Sep 15 (Sell – $131.19). Blackmores trades on a price-earnings ratio of 22 and has a dividend yield of 3.3%. Given the declining sales and deteriorating balance sheet, we're lowering our price guide to build in a larger margin of safety. But with good management and a solid brand, we're sticking with HOLD.