Shares in package holiday retailer On The Beach (OTB) have hit a rough patch after the firm gave the market a nasty shock with a profit warning.

The share price plunged 17% to 370p in early trading after the company said full year performance will be below expectations because the likelihood of no-deal Brexit has made the pound weaker.

In a trading update, On The Beach explained that, unlike its competitors, it constantly adjusts its prices to account for currency fluctuations rather than hedging against big foreign exchange movements.

CAUGHT OUT BY STERLING DROP

Big companies often pay investment banks for products that effectively protect them from foreign exchange movements, but smaller companies often save that cash and take a view themselves on how the pound will trade against the dollar and euro, which in this case has caught On The Beach out.

READ MORE ABOUT ON THE BEACH HERE

Because sterling has significantly devalued against the euro from the start of May, with a sharp decline at the end of July and start of August, this has resulted in a marked increase in On The Beach’s prices compared to its rivals.

That has meant, despite growth in demand, the firm has struggled to gain market share while maintaining margins.

But On the Beach chief executive Simon Cooper said the firm remains ‘confident in the resilience and flexibility’ of its business model, and is focusing on ‘profitable growth’ and being able to capitalise on any structural changes in the market.

ANALYSTS 'SUPPORTIVE' OF BUSINESS MODEL

Numis shares that confidence despite trimming its forecast for full year pre-tax profit by 9% to £34.3m.

The broker said, ‘We continue to be highly supportive of OTB's non-risk business model. Whilst FX in recent years has been a headwind, it has still achieved 23% [annual earnings per share growth] and, supported by investments (Classic, long-haul, international), we forecast 17% [earnings per share growth].’

On The Beach bought operator Classic Collection last year as it looks to break into the offline market, and recently signed up airlines British Airways and Emirates, adding to the long-haul options that it offers.

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Issue Date: 09 Aug 2019