Enthusiasm For Treasury Wine Runs Dry

Australia | 10:30 AM

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Caught in a nexus of falling Chinese demand and Californian distribution travails, Treasury Wine withdraws earnings guidance.

• The bad news just keeps coming for Penfolds, as Chinese demand falters
• Cailfornian distributor transition turns into a bigger inventory headache
• Uncertainy and lack of earnings visibility drive substantial earnings downgrades

By Danielle Ecuyer

Major investor disappointment as guidance withdrawn

As the saying goes, “when it rains, it pours,” and in the case of Treasury Wine Estates ((TWE)) the bad news just keeps coming.

Trade disputes with China, a pandemic, a major US acquisition (DAOU), and shifting demographic consumption patterns for wine and alcohol have structurally altered the shape of what was once one of the top-performing, quality Australian exporters.

A strategy of premiumisation both in the Americas and with the Penfolds brand in major Chinese markets was considered a pathway to offset excess supply in the lower-tier wine segments, as well as to address younger demographics shifting away from alcohol and wine.

The share price, having reached a high of $14-plus in January 2023, received another blow yesterday post the company’s 1Q26 trading update. The stock traded down just over -15%, the biggest loser on the day inside the ASX300.

The trading update brought forth a combination of largely “disappointing” news, Morgans bemoans, across its China and Americas operations.

For starters, the overarching setback was management withdrawing earnings guidance for the current fiscal year and FY27, as well as putting a $200m share buyback on hold, having completed just $30.5m, or 15%, since the August result.

Citi believes the decision to pause the buyback strengthens the case around the company’s level of uncertainty about the outlook and the volatility in business performance.

For both investors and analysts, a lack of earnings visibility always leaves an uncomfortable taste of uncertainty as to whether the issues creating the problems are cyclical, structural, or a combination of both.

Ancient-bottles-of-wine

Chinese restaurant revenues under pressure 

Penfolds’ earnings (EBIT) growth of around 15% for FY26 has been withdrawn.

While Macquarie and Ord Minnett had already pointed to downside risks, the extent of the disappointment clearly surprised even the more cautious analysts.

Ord Minnett had previously proffered management’s guidance was too upbeat given the well-known challenges in both the American and Chinese markets, as well as the new incoming CEO, Sam Fisher, seeking to “clear the decks” and reset market expectations, as is so often the case with new management.

As described by Macquarie, Penfolds is basically an “Asian” brand, with two-thirds of revenue generated from Asia. Within that region, China represents two-thirds.

Depletions, being the volume of wine shipped out of a distributor’s inventory and sold, remained weak in China after similar weakness in June. September depletions advanced on the prior year but remain weak and below management’s projection.

Early signs from the Mid-Autumn Festival show volumes continue to face challenges and, should the trend be sustained, Penfolds will not achieve FY26 targets, hence the withdrawal of guidance.

The Macquarie analyst attributes the depletion miss to lower demand, with fewer people dining out and spending less, as well as the Chinese government’s alcohol ban for employees, which has lowered business entertaining.

The government’s measures commenced in May this year, with business and government “elites” representing around 50% of the food and beverage industry’s revenue.

According to the National Bureau of Statistics, restaurant revenue growth moderated by -3.6% in the June half-year, with noticeable declines in Shanghai and Beijing.

Both planning and forecasting for a weak market is challenging, prompting Macquarie to assume a fall of -50% in Chinese volumes in FY26. Stock will be re-allocated to other markets at lower net sales revenue per case.

In FY25, Asia net sales revenue per case was $418 compared to $257 per case for the balance of global volumes. This results in a forecast decline in Penfolds revenue for FY26 by -$40m, or -$11 per case. A FY27 recovery in Chinese volumes is anticipated by Macquarie.

The analyst at UBS points to the historical trend of Penfolds being re-allocated to other markets as a working solution.

In the current case, there is less support due to the scale of China for Penfolds, at around 70% of net sales revenue for Asia, with increased risk of parallel imports back to China and more moderate success in developing demand in other markets.

California distribution wows weigh

Treasury Americas ex-California is performing well, Morgan Stanley observes, while also pointing to the unknown scale of impact from the transition of distributor as an ongoing threat to volumes.

Treasury Wines is continuing to negotiate with Republic National Distributing Company (RNDC) while transitioning to Breakthru Beverage. The size of the impact could equate to around -$100m, or the equivalent of RNDC’s California inventory position, above the previously cited -$50m impact from the change in regional distribution.

Morgan Stanley notes the ability to offset some of these impacts remains dependent on the outcome of negotiations, hence why management has withdrawn guidance.

Morgans emphasises ex-California, which represents around 25% of Treasury Americas’ net sales revenue, the luxury category of depletions rose 5%, led by Daou, Frank Family, and Stags’ Leap.

UBS details how the US alcohol market is experiencing what the analyst refers to as a “step-change down,” with softer demand and less effective marketing of wine to the new consumer.

The company is believed to be in a better position as the number one player in the number one luxury market globally.

Brokers struggle to be more upbeat until the outlook improves

Citi remains the most downbeat on the stock out of FNArena’s daily monitored brokers, almost audibly sighing across the research page with “Another earnings downgrade into this week’s AGM,” which is scheduled for October 16.

The analyst reiterates its Sell rating and drops its target price to $5.50 from $7, the lowest amongst the brokers.

Earnings risks across Treasury’s major markets, China and the Americas, as well as further uncertainty regarding the incoming CEO’s strategic plans, overwhelm what some may view as an undemanding valuation of around 10 times FY26 downgraded earnings.

The analyst’s earnings downgrades are relatively modest given the lower expectations pre-1Q26 update.

By contrast, Morgans, Ord Minnett, and UBS have taken a more aggressive stance in lowering their EPS forecasts post-update, with UBS slicing -22% and -29% from FY26/FY27 estimates, resulting in a stock downgrade to Neutral from Buy and a -35% reduction in target price.

As the comparative between the analyst’s EPS and target price would infer, multiple compression or a decline in ascribed valuation is evident.

Morgans also downgraded the stock to Hold from Buy, with a new target price set at $6.35, down from $10.10.

FNArena’s consensus price target has fallen around -25% post update to $6.08 from $8.878. Post downgrades there are five Hold-equivalent ratings and one Sell rating.

Uncertainty and concerns over what aspects of the business are impacted cyclically (think inventory oversupply) versus structurally (changing alcohol consumption patterns) lead brokers like Morgan Stanley to envisage risks of further downgrades.

While Morgans stresses the quality of the assets and brand portfolio, these are overshadowed by uncertainty. For Ord Minnett, a re-rating is on hold until the new CEO outlines his strategy, which is not expected until first-half results in February or an investor day down the track.

Despite the downbeat outlook, Treasury’s management stressed liqudity for the company remained more than sufficient around $1bn with “significant headroom to the financial covenants under its borrowing arrangements”.

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