Flight Centre under review after profit warning
Recommendation
In Flight Centre getting cheaper on 26 Nov 14 (Hold – $41.37), we said we were planning a detailed review in the new year and that 'with any luck Flight Centre's share price will fall further in the meantime'. Well it's certainly done that – but today's profit warning has also given it good reason.
We've been in no rush to upgrade due to concerns over the slowing local economy and the impact a lower Australian dollar might have on demand for overseas travel, and our reticence appears to have been warranted. What the company described as 'some ongoing volatility in Australian leisure' in its full-year results has now become a 'leisure travel spending slowdown', which has led to lower sales at 'slightly lower' margins as commissions have been reduced in a bid to lower overall prices and stimulate demand.
At the same time, the company has 'altered front-end pay structures' and continued to expand, resulting in increased wage, occupancy, and sales and marketing costs. As a result, the company now expects to make an underlying profit before tax of $360m–$390m compared to last year's $376.5m and the previous guidance of $395m–405m.
The wider guidance range suggests management might be taking a conservative approach – but the market is doing the same by marking the shares down around 8%. The caution is understandable given the volatility of Flight Centre's profits in the past.
We'll stick to our original timetable of a detailed review in the new year. In the meantime we're placing the stock UNDER REVIEW.