Blackmores' outlook for the second half of FY22 and beyond disappointed the market in February, as high investment expenditure looks to drag on earnings potential.

-Blackmores' strategy calls for high investment, adding pressure to company earnings
-Brand rebuild in existing markets and new market launches present costly initiatives
-The company is targeting a sizeable $250-300m sales uplift by FY24

Analysts have expressed disappointment with Blackmores' ((BLK)) near-term outlook given high levels of investment will result in subdued earnings capacity for the company.

Management at the producer of vitamins and nutritional supplements has outlined a clear strategy to achieve material earnings growth targets by FY24, but nearer-term results will suffer. Company strategy appears to target both a rebuild of the brand in existing markets through increased marketing expenditure and the pursuance of new market launches to support growth, with both strategy pillars requiring significant investment.

Blackmores continues to pursue a revenue target of $825-875m over the next two years, equating to revenue growth of $250-350m, as well as growing profit margins above 55% and earnings margins to around 15%. In February, the company guided to a significant step up in advertising and promotion spend in the coming half to support the strategy, with expenditure expected to exceed -$10-15m.

Full year guidance is for earnings of $58m, up 20.8% on the previous year. A reported first half earnings result of $38.3m has the company on track to achieve this guidance even though earnings are anticipated to be first half weighted.

Gross profit rose 19.4%, but expense adjustments did limit reported earnings and profit growth, which would otherwise have reached 35% and 27% respectively. The company's Business Improvement Program is also on track to deliver savings of -$40-42m by year's end, and Blackmores reiterated a targeted -$55m saving by the end of FY23.

Covid continues to drive a demand for immunity products, but this benefit will likely be less prominent in the coming half. Domestically, analysts suggest the upcoming cold and flu season offers upside potential, and should benefit from additional marketing expenditure.

With a more buoyant earnings outlook for the company pushed back, Blackmores' share price currently appears to be lacking value compared to peers. Despite this, analysts reiterated the company's strategic direction appears sound and sizeable investment is required to achieve longer-term value.

China and Australia & New Zealand key to near-term targets

Reaching second half targets will require increased sales momentum in both China and Australia & New Zealand. Performance in the regions are a key driver of company earnings, contributing a combined 63% of group earnings in the first half.

Positively, A&NZ reported 14% growth in the first half and the company is guiding to continued recovery in the region in the coming half, but margin expansion was supported by reduced advertising and promotional expenses and reduced discounting of product, a strategic move which may not be sustainable in the currently competitive market.

Data show China consumers demonstrate a preference for domestic brands, which could present a challenge to Blackmores' performance looking ahead, particularly given a lack of strategic partners in the region.

Outside of these key markets the company is focused on growth in other international markets, particularly Indonesia and India, and strong performance in other regions could offer upside risk, analysts concede. Indonesia offers the company access to a potential $1bn total addressable market, and the region reported 110% revenue growth in the first half.

With the market having had time to digest Blackmores' first half results and second half outlook, Goldman Sachs has downgraded to a Sell rating from a Neutral rating over the weekend past and noted Blackmores may offer the lowest total shareholder return potential in its ASX-coverage.

Goldman Sachs expects geographical diversification to benefit the company and anticipates Blackmores can deliver on growth in China through targeted e-commerce investment, but on-track strategy didn't alleviate the forecast for subdued earnings ahead for the broker.

Citi, while retaining a sell rating, questioned the sustainability of the high earnings contribution Blackmores receives from its Chinese and A&NZ operations. Citi also noted a softer-than-expected outlook for the second half increases the risk of the company not achieving medium-term targets.

Credit Suisse reduced its earnings forecasts -10-15% through to FY24, though the reductions are largely related to changes in accounting standards.

The broker noted achieving full year earnings guidance will depend on finding savings elsewhere but suggests the company could scale back costly advertising and promotion plans to meet targets if necessary.

Credit Suisse likes the opportunity presented by investment in Indonesia, expecting the Blackmores Indonesia joint venture can achieve a 34% compound annual growth rate through to FY25.

Morgans, on the other hand, saw how Blackmores' first half earnings result beat its own forecast, but a disappointing performance in China alongside disappointing company guidance subsequently led to profit forecast reductions of -18.6%, -10.0% and -11.1% through to FY24. Morgans noted the company's strategy is clear but achieving targets won't be easy.

FNArena's consensus target price, calculated as the average of the brokers mentioned plus Ord Minnett, currently sits at $82.91, suggesting double-digit percentage upside potential following recent share price weakness.

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