Convivality plc, the off-trade retailing business that operates franchises such as Bargain Booze, Bargain Booze Select Convenience and Wine Rack, has issued a profit warning after what it describes as a 'material error' in the financial forecasts for its Conviviality Direct business.
It said that it now expects adjusted EBITDA for the current year to 29 April, to be 'approximately 20% below current market expectations', of around £5.2 million.
It added that the previous guidance for net debt of around £150 million for the period remains unchanged.
'Whilst our sales and orders have held up at levels ahead of last year, demonstrating that our one stop shop model is working, margins in Conviviality Direct have softened across January and February,' the company said in a statement.
'In the revised guidance the Company has assumed a continuation of the margin weakness for the remainder of the current financial year. A number of enhanced controls and disciplines have been introduced to address this and management believes that appropriate corrective actions are in place.'
The company also noted that it has not seen any 'material weakness in overall demand', and that previously-announced cost saving actions remain 'fully on track'.
Analyst Response
Following the announcement, Shore Capital Stockbrokers downgraded its Buy recommendation on Conviviality to Hold, with analyst Phil Carrol noting, "What is most concerning for us is the causes and materiality of the 20% downgrade to FY2018F EBITDA expectations."
Carroll added that Shore Capital believes that management information reporting at Conviviality "has been insufficient as well as the structure of the reporting chain to higher level management, resulting in gaps in financial expertise where it has been required i.e. financially trained staff reporting to non-financially trained management.
"These factors have impacted the quality of the internal forecasting process with insufficient oversight to the extent
an error has been highlighted at this late stage of the year. This may also lead to investors also questioning the level of non-exec director oversight and responsibility too, in our opinion."
Half-Year Performance
In January, Conviviality reported that revenue increased by 9.2% in the first half its financial year, with EBITA up 1.7% to £23.3 million.
“We have made deliberate choices to successfully grow market share and enhance the quality of future earnings by agreeing long-term contracts with our larger customers and securing new national-account customers,” Diana Hunter, the business' chief executive, said at the time.
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
