Why the Bubs (ASX:BUB) share price is pushing 5% higher

The Bubs Australia Ltd (ASX:BUB) share price is on the move on Friday following the release of its third quarter update…
The post Why the Bubs (ASX:BUB) share price is pushing 5% higher appeared first on The Motley Fool Australia. –

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The Bubs Australia Ltd (ASX: BUB) share price is pushing higher today following the release of its third quarter update.

In early trade, the goat milk infant formula company’s shares are up 5.5% to 46.5 cents.

How did Bubs perform in the third quarter?

Bubs was out of form during the third quarter, reporting a 40% year on year decline in gross revenue to $11.8 million.

While this was driven largely by a surge in sales in the prior corresponding period due to COVID-19 pantry stocking, it is worth noting that revenue is also down 7.8% compared to its second quarter gross revenue of $12.8 million.

This is despite the company increasing its footprint across leading Australian retailers such as Coles Group Ltd (ASX: COL) and Woolworths Group Ltd (ASX: WOW) during the quarter.

What were the drivers of its result?

Third quarter domestic sales (inc. daigou) were down 52% on the prior corresponding period. These sales account for 51% of its gross revenue.

Also declining during the quarter were its sales to international (ex. China) markets. They fell 4% over the prior corresponding period but rose 1% quarter on quarter.

Offsetting some of this decline was a 42% increase in China sales. These accounted for 30% or ~$3.54 million of gross revenue.

Interestingly, despite posting such a sharp decline in domestic sales, the company notes that it remains the fastest growing infant formula manufacturer across Woolworths, Coles and Chemist Warehouse. Though, it is worth remembering that with domestic quarterly sales of just $6.5 million (including the daigou channel), it is working from a very small base.

Overall, the decline in revenue ultimately led to an operating cash outflow of $3.7 million for the period. This left Bubs with a cash balance of $36.3 million at the end of March.

Beingmate joint venture scrapped

In August last year the company announced a joint venture agreement with China-based Beingmate. Management labelled the agreement a “pivotal breakthrough manufacturing arrangement to support obtaining SAMR registration for Bubs goat infant formula in China.”

This joint venture is now being scrapped and Bubs will go it alone in the China market instead.

It explained: “In order to drive the highest margin for our core products in the channels where we see the highest opportunity for growth, Bubs is simplifying its structure to be under the Company’s direct control. Bubs has reached agreement with Beingmate to unwind the Joint Venture, ‘Bubs Brand Management Shanghai Co. Ltd,’ of which Bubs holds 49% interest, resulting in the termination of the existing Trade Mark Licence Deed and Exclusive Distribution Agreement. Bubs has commenced the process of establishing a wholly owned operating subsidiary in China. Associated costs with the restructure are likely to be immaterial.”

Bubs’s Chairman, Dennis Lin, added: “This move is a direct reflection of the favourable results we have already seen in our direct supply and focus on the cross-border e-Commerce Channel, as well as our Online-to-Offline and General Trade customers. Under the new fully controlled China entity, we will have our own China sales structure and the flexibility to leverage profitable growth opportunities.”

Judging by the Bubs share price performance today, some investors appear to believe this is the right strategy.

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James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of BUBS AUST FPO. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool Australia has recommended BUBS AUST FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why the Bubs (ASX:BUB) share price is pushing 5% higher appeared first on The Motley Fool Australia.

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