Remy Cointreau SA (RCO), the maker of Remy Martin, said it expects a “substantial double-digit decline” in annual earnings as China’s crackdowns on extravagant gifting and dining weigh on demand for expensive cognacs.
The shares slumped as much as 9.7 percent, the most in almost five years, after the company said the business climate will be “less favorable” in the second half of the year.
What Remy described as an “unfavorable situation” for imported spirits in China has left retailers with high levels of unsold inventory. That’s hurt both volume and profitability as some consumers have switched to cheaper cognacs than varieties that can sell for thousands of pounds. At the same time, Remy is also contending with weak demand in Europe.
“Clearly the problem in China weighs on our outlook,” Chief Executive Officer Frederic Pflanz said on a conference call. “There’s been no change in the last six months and we don’t expect any short-term change” in government policy.
Profit for the financial year through March could fall “20 percent perhaps,” Pflanz said on the call.
Remy isn’t alone in being affected by a slowdown in China, where the new government has curbed lavish spending, particularly on official banqueting and gifting -- prime cognac purchasing and drinking occasions. Larger competitor Pernod Ricard SA (RI) said Oct. 24 that sales of its Martell cognac brand fell 12 percent in the fiscal first quarter, and that the timing of any recovery in China was “unclear.”
“What happened to the Chinese recovery?” Jonathan Fyfe, an analyst at Mirabaud in London, wrote today in a note to clients. Remy’s outlook statement “reads very negatively.”
The shares were down 9.4 percent to 65.20 euros at 10:28 a.m., the steepest drop in the Euro Stoxx 600 Index. Pernod fell as much as 2.8 percent and Diageo Plc (DGE) as much as 1.1 percent.
First-half adjusted operating profit fell 7.3 percent on an organic basis, totaling 132.7 million euros ($180 million), Remy also said today. Organic profit at its cognac unit declined 12 percent to 116 million euros.
Remy said it remains confident in its medium and long-term outlook in Asia, “particularly in China, where its development potential remains unaffected.”
Profit at its liqueurs and spirits unit rose 2.6 percent in the first half as Remy increased sales of Cointreau and Mount Gay rum, while maintaining the pace of marketing investment.
Sales declined 3.6 percent on an organic basis to 558 million euros in the six months through September, while net income fell 20 percent to 69.3 million euros.
To contact the reporter on this story: Clementine Fletcher in London at email@example.com
To contact the editor responsible for this story: Celeste Perri at firstname.lastname@example.org