A profit warning by private label shower gels-to-shampoos developer McBride (MCB) provides a timely reminder that not all 'defensive' stocks are immune from market shocks.
The £251.5 million cap blamed weaker consumer demand and heavy promotional activity in its third quarter for an expected annual earnings shortfall, sending its shares down 12.9% to 120.25p.
Defensive stocks are ones which are considered to supply – or be involved in – goods and services that we rely upon in everyday life. These include utility companies, food producers/retailers and cigarette markers. Their share prices are likely to deliver slower gains than cyclical stocks like recruitment companies and airlines, but they are deemed more resilient in hard times because we still need their products and services regardless of economic strength or weakness.
McBride produces household and personal care products ranging from toothpastes to oven cleaner and dishwasher tablets. These are sold to retailers throughout Europe.
Today's profit warning reveals that sales between 1 January and 20 March were 6% lower year-on-year. Volumes in its third quarter have been hit by weaker demand from cash-strapped consumers in Western Europe, as well as 'a very recent, unusually strong and prolonged period of branded promotional activity', thought to be in the UK.
So it is suffering from reduced profit margins as the aforementioned marketing activity suggest that its goods are being sold at a discount. The demand weakness is also a concern, given that private label – also known as 'own label' – goods are meant to be the ones flying off the shelves, as consumers can buy supermarket-branded items cheaper than ones from third party, well-known brands.
With weak demand spilling over into its fourth quarter, McBride expects full year sales to fall 'around 3%' short of expectations, dragging adjusted operating profits lower as a result. McBride's board, headed up by chief executive officer Chris Bull, still expects to see growth in private label revenue in the fourth quarter however, as new products are rolled out. He insists 'decisive action' is being taken to speed up cost cutting initiatives.
McBride last month (7 Feb) posted encouraging half-year figures (7 Feb) showing 13% operating profits improvement to £11.6 million. Yet the highly-operationally-geared company has offended investors in the past with earlier profit warnings. Its reliance on volatile oil-derived inputs, which can take time to recoup from customers, is an ever-present cause for concern.
Investec analyst Nicola Mallard has downgraded her June 2013 pre-tax profit tax forecast by 24% to £18.5 million; and slashed 2014's numbers by 23% to £26.5 million. 'In light of (today's) revenue set back, the group is accelerating its cost reduction efforts and has projects in the pipeline that could save c£5 million, although we have not yet reflected these in our forecasts', writes the analyst, who has placed her recommendation and price target under review.
More upbeat is Panmure Gordon, which has downgraded its numbers and target price from 150p to 130p, yet reiterates its 'buy' rating on the stock. The broker writes: 'Despite this morning's downgrade, which we regard as being related to a short-term issue, we believe that the recent strategic actions by McBride to reduce costs, simplify the supply chain and focus on core and future growth categories will ultimately result in significantly improved margins and returns over the medium to long term.'