Analysis - Remy Cointreau, dead cats and the power of China's new year
Remy is banking on a Q4 bounce
Has Remy Cointreau bitten off more than it can chew?
The spirits producer has promised a return to organic sales and cash-operating profits growth by the end of this fiscal year in March. If it were to achieve this it would help put a cap on a tough couple of years that saw Cognac sales in China plummet, badly affecting the Remy Martin brand, which accounts for the lion's share of Remy's revenues.
But in YTD results released yesterday, despite an upturn on Greater China Cognac shipments in Q3, the value of sales by wholesalers (known as value depletions) continued to drop at the same rate it had all fiscal year, by about 10-15%.
An analyst on a call with Remy's CFO Luca Marotta yesterday calculated that, to achieve its FY growth goal, the company will have to post a 20% lift in sales in Q4. Considering that so far this fiscal year, Remy's sales have dropped by 12%, is this possible?
According to Marotta, it is, and in the call he outlined why.
Remy will have a number of tailwinds this quarter, including a very weak comparison from last year's Q4, when sales were even lower than usual in a historically quiet period. Also, this year the important Chinese New Year sales period arrives later than usual, falling mainly in the final quarter as opposed to Q3. That means yesterday's YTD figures were not a fair comparison to other years, and Remy is banking on a final Q4 push from the new year to get it over the line.
Marotta said he is “confident” the company will achieve its target. His confidence was backed today by analysts who recognise the power of Chinese New Year sales.
But some argue that a Q4 rebound is not necessarily a good thing.
Analyst Bernstein said Cognac growth in China will be 47% in Q4 because of the new year and the high levels of destocking from last year that has left an easy comparison. This, says Bernstein, is the so-called “dead-cat bounce”, a sales phenomenon the analyst first forecast last year and is described as a small, yet brief, recovery in a terminal drop.
Therefore, the expected Q4 rise will not mean that Remy's Cognac sales are recovering in China, it only suggests that the rapid descent has halted.
Bernstein also warns that fresh clampdowns on corruption and extravagance from Chinese authorities could “further depress demand for superior Cognac”, though Marotta said there is no indication that this will happen.
The good news for Remy is the growing strength of China's so-called modern on-trade - defined as night clubs, bars and "family" karaoke as opposed to hostess bars - as well as some long-term fundamentals in the country that may revive even the deadest of cats.
In a note on Pernod Ricard earlier this month, Bernstein said it was still a “long-term optimist” about further Cognac growth in China. Its reasons included a low per-capita consumption level (23-times less than in Africa) and cultural differences that mean Cognac sales won't disappear as they did in Japan after the 1990s crash.
In the short-term, however, Cognac still has some convincing to do. And according to Marotta, that starts with the gatekeepers of the country's alcohol industry - wholesalers. Yesterday, Marotta made an apparent plea to wholesalers to up their stock levels a touch for Chinese New Year. Q4 performance will be less about the timing of the new year, Marotta said, and more about the “attitude of our wholesalers to increase a little bit more”. The CFO admitted this might see the wholesalers lose some sales, but it would be of great help to Remy as it chases its full-year goals.
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