AG Barr plunges after this shocker

A star stock for years, this profits warning was out of the blue and shareholders are bailing. 

A record Barr (A G) (LSE:BAG) share price signalled last month that the maker of Scotland's other national drink had won over the doubters following the 2018 changes to its Irn-Bru recipe.

The new formula, which cut the sugar content by half ahead of the government's levy on sugary drinks, initially triggered a Hands Off Our Irn-Bru petition and even reportedly caused some devoted customers to stockpile the old version.

Despite the protests, annual results in March showed good progress for the group as the regular version of Irn-Bru increased its volume share of the total UK carbonates market by 4.2%.

Shares in the FTSE 250 index company peaked at 969p in June - only to crash 25% or 217p to 652p today after a surprise warning from Cumbernauld-based AG Barr that profits for the current financial year would be up to 20% lower than the previous year.

Part of the reason for today's disappointment is that Barr has returned to a more normal pricing strategy after last year's short-term focus on volumes in order to support Irn-Bru.

This has been exacerbated by some specific brand challenges, particularly in Rockstar energy and Rubicon juice drinks. The disappointing spring and early summer weather in Scotland and the north of England has made matters worse given comparisons with last year's heatwave.

Source: TradingView Past performance is not a guide to future performance

Revenues for the first half to July 27 will be down about 10% to £123 million, which AG Barr won't be able to offset through expectations for a stronger second half of the year. On a brighter note, the company's 2015 acquisition of cocktail mixer business Funkin continues to pay off after its performance went from "strength to strength" in the first half.

House broker Shore Capital now expects earnings per share for the group to fall by 23% this year to about 25p. Investec's Nicola Mallard is making a similar reduction, but expects growth to resume in the 2021 financial year and beyond.

Shore's research analyst Alex Smith is also backing the company to deliver on its potential, despite today's setback. He added: “In our opinion Barr is a fine company, with an excellent portfolio of brands, world-class manufacturing facilities, a strong balance sheet and high quality management.

"The business has these traits because of high quality management. In the recent trading period there has clearly been a much tougher financial outcome than management and we anticipated."

Smith previously had a target price of 869p, while Investec's Mallard is revisiting her 885p recommendation in light of today's profits warning. Among other drinks companies, Britvic (LSE:BVIC) shares were down 2% and Fevertree Drinks (LSE:FEVR) fell 1%. Like AG Barr, shares in Robinsons and Fruit Shoot owner Britvic had been trading at a record high earlier this year.

AG Barr chief executive Roger White said his company would take action over the second half of the year to address specific brand-related issues. This includes the planned launch of three new Rockstar products and recipe improvement activity for Rubicon juice drinks.

It also recently launched an Irn-Bru energy drink, while White said there were signs that the brand's new pricing position was gaining acceptance.

White added:

"We are focused on returning to growth and will continue to take the actions we believe necessary to succeed in the dynamic environment within which we operate."

Irn-Bru was launched in 1901 containing 32 separate ingredients and was originally called Barr's Iron Brew. The recipe remains a closely guarded secret known by only three people, two of whom are members of the Barr family.