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Oatly (NASDAQ:OTLY) has joined the long list of companies that have taken a hit due to production and distribution problems. In the case of this maker of a non-dairy alternative to milk, this has cost it $7m.

Oatly is also expecting further lost sales in Europe due to an undefined quality issue. None of this was well received by investors on Monday who dumped shares, and fast.

Why were investors so upset?

It looks to be mostly about the pandemic for Oatly. The company said UK sales were $1m off during Q3 due to the driver shortage problems and it also had issues with its US production plant in Utah (another $3m taken off sales). Closures of hospitality businesses in Asia cost Oatly a further $3m.

Oatly also said that the pace of sales was off in Europe and the Middle East, again because of the pandemic. It goes to illustrate that when you are in the business of manufacturing a dairy alternative in factories, you can be clobbered by the sort of disruption we saw in 2020-21.

How has the Oatly share price been doing?

Not well, I’m afraid. Oatly listed in the US back in May and shares have coughed up almost 60% since then. Although backed by heavy weights like private equity kings Blackstone and celebs like Oprah Winfrey, Oatly is having to compete in a market where there are more alternatives every month. Just check out the dairy aisle in your local supermarket and you will see what I mean.

We are not seeing any signs of a reversal of fortunes in the Oatly share price. Momentum is non-existent, unless you are looking at shorting it, and net income and normalised EPS are also declining. While total revenue has been going up, we think the 2022 forecasts being bandied about look too bullish to us. Right now you are looking at a return on capital of -10.3% and a return on equity of -25.3% (data from Stockopedia).

Is there any good news here?

Oatly says it expects FY 2021 revenue to exceed $635m compared to the previous outlook where it was talking about $690m. Revenues are up, there’s no denying that (a 49.2% increase no less). Gross profit was $125m with a 27% gross profit margin. While profits overall are down slightly, volumes are up. Oatly produced 131m litres in Q3 against 74m litres last year. It is making more and it is selling more. It has reported broad-based growth across both retail and food service channels and is seeing a boost from the reopening of on-premise outlets.

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What does the Armchair Trader think?

We’d be cautious with Oatly. We like the product, we like the alternative to dairy story, and with pressure on global agriculture post-COP 26, we think the shift off dairy is going to continue long term. We would expect Oatly to continue to achieve growth in sales and distribution globally and it has a good brand to boot.

The issue here is that the stock remains very close to its IPO and there is bound to be further selling from pre-IPO owners. On top of that there are various numbers in the balance sheet we don’t like. Take the Q3 EBITDA loss of $36m, which is up from $4m in Q3 2020. Oatly said this was due to “share-based compensation costs of $10.4m.” That’s just one example.

The other issue is the one around competition: Oatly has a great product and is scaling up as quickly as it can, but it has to do battle with some very large, very well-established diary operators (e.g. Danone) who are also making the shift to non-dairy products. The only difference is that Danone has its massive existing distribution network to play with. Oatly is still building one.


Please note this article does not constitute investment advice. Investors are encouraged to do their own research beforehand or consult a professional advisor.

Stuart Fieldhouse

Stuart Fieldhouse

Stuart Fieldhouse has spent 25 years in journalism and marketing, including as a wealth management editor for the Financial Times group, covering capital markets and international private banking, and as an investment banking correspondent for Euromoney in Hong Kong. He was the founder editor of The Hedge Fund Journal.

Stuart has worked at CMC Markets, supporting the re-launch of its global financial spread betting and CFD trading platforms. He is also the author of two books on trading, published by Financial Times Pearson. Based in The Armchair Trader’s London office, Stuart continues to advise fund managers, private banks, family offices and other financial institutions.

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