Bubs Australia shares crash on China sales squeeze but on track for permanent US access

Bubs Australia shares crash on China sales squeeze but on track for permanent US access

The numbers fell short of some analysts’ expectations, sending the stock tumbling as much as 12 percent in early trading. It was down 8.45 per cent at 32¢ by midday AEDT.

Kristy Carr, founder and chief executive of Bubs, said strong year-on-year growth in Australia and the United States was offset by the impact of China’s now-abandoned COVID-zero policy on consumers.

“China’s prolonged lockdowns during the quarter delayed our transition to Bubs’ new ‘manufacturer-to-consumer’ (M2C) model in partnership with AZ Global, as we continue to sell through initial pipe fill orders from previous quarters, leading to a 66 percent drop in gross revenue compared to the previous corresponding period,” she said.

In March, entities associated with his AZ Global entered into an equity incentive agreement with Bubs. AZ Global is the main corporate daigou partner for Bubs.

Under the partnership model, Bubs baby formula is delivered duty-free from bonded warehouses in China. The embedded inventory system provides end-to-end channel visibility, which has been problematic in the past. Ms Carr said following the easing of COVID restrictions, Bubs plans to expand its M2C distribution across online-to-offline (O2O) stores.

China faces a declining birth rate and a persistent oversupply of infant formula.

Citi analyst Sam Teeger said in a note that recent data suggests China’s total population will decline in 2022 for the first time in 60 years. Citi’s China analysts tip the birth rate to fall further in 2023 due to recent COVID-19 spikes.

Bubs has become a superstar in the US – the world’s second-largest baby formula market at $US5.6 billion ($8 billion) – after it was one of the first companies last year to be granted special import access to help with formula shortages . Bubs has shipped over one million cans to the US to date.

The market that was essentially closed to outsiders, controlled by a few multinational corporations, now appears to be open to other players, including Bubs.

“Bubs is on track to meet regulatory milestones for permanent entry into the US market and is working closely with the FDA [Food and Drugs Administration] and other stakeholders to help diversify America’s infant formula supply chain and ensure continued availability in the US market,” she said.

“We believe the goat milk market segment has significant growth potential and is likely to follow similar growth trends experienced in Australia, New Zealand, Europe and Asia in recent years.”

Ms Carr said Bubs had received the FDA’s recognition that the company has the ability to meet all the requirements for permanent access for all six infant formula products by October 2025.

Bubs rapidly scaled its retail footprint during 1H23, now standing at more than 6,500 stores in 42 states, including the four largest retailers of infant formula; Walmart, Target, Kroger and Albertsons Safeway, as well as health food chains such as Whole Foods. Bubs will also roll out to approximately 700 Rite Aid pharmacies in February.

Bubs held $51.4 million in cash reserves as of December 31. The company made payments of nearly $296,000 to key management in the quarter.

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