Blackmores reinvestment for growth to suppress near-term earnings: Goldman Sachs

Goldman Sachs expects muted earnings growth from Blackmores (ASX: BKL) in the near-term following higher reinvestment and a strategic reset under new management. 

The downgrade comes amid Goldman’s recent preference for retail and eCommerce stocks in an inflationary environment. This is under the premise that “strong end market demand should provide greater ability to pass on higher input costs.”

“Reinvestment to suppress near-term earnings”

“Blackmores is executing well against its strategic plan as evident in the 1H22 result,” the broker noted.

While Blackmores shares struggled for upside on the day of its half-year results, the company was able to show its return to sustainable, profitable growth.

Notable highlights from February reporting season include: 

• Revenue of $346m, up 15%

• Net profit of $20.8m, up 9.6%

• Gross margin of 54.2%, up 2.3 percentage points

• Interim dividend of 63 cents, up 117%

Looking ahead, Blackmores is doubling down on reinvestments to rebuild its brand in existing markets, launch into new markets and drive efficiencies throughout the business.

Management said that Group investments will be $10-15m higher in the second-half of the year compared to the first-half, which could easily erode the company’s bottom line. 

“This higher reinvestment flagged by the company will result in a subdued earnings environment over the medium term,” warned the broker. 

Goldman downgraded Blackmores to a Sell (from Neutral) with a $75.20 price target. 

This represents a downside of -1.4% compared to Tuesday’s open of $76.26.

Strategy on track 

Blackmores said the business is on-track to deliver $55m in annualised gross savings by FY23 as well as prioritising new product innovation and digital investments.

Goldman believes the company's suppressed near-term earnings will outweigh the strategic turnaround.

Upside drivers 

In terms of what might make the broker more positive on the stock, Goldman pointed out the following:

• Stronger than expected demand from international markets such as Indonesia and India 

• Elevated demand for immunity related products, which grew circa 25% year-on-year in the first-half

• Recovery of daigou channel

• Success of new product launches in Asia and China

Blackmores 12-month price chart