Flight Centre (FLT) shares took flight yesterday and sank nearly 9% after the company formalised what many investors had been waiting for – a profit downgrade.
Flight Centre has been dangling hints of a weakening earnings outlook – six weeks ago shareholders were told at the annual meeting that the company was on track to achieve its forecast for an underlying profit before tax of between $395 million and $405 million this financial year, up 5% to 8% 2013-14, but qualified that by saying reaching the targets would not be a formality.
Yesterday that qualification was borne out when the company told the ASX that earnings in the year to June, 2015 would be down 4% at least on 2013-14’s levels.
Flight Centre has also forecast its pretax profits for the first half to fall by up to 7% to $136 million.
The shares, which have been falling now for months, lurched downwards and ended off 9% at $31.87.
The shares are now down 43% since their record high of $55.57 in March.
FLT YTD – Flight Centre strikes turbulence
Flight Centre blamed challenging trading conditions in Australia for the profit downgrade.
“Trading conditions in Australia remain challenging following the leisure travel spending slowdown late in 2013-14,” it said yesterday.
Instead of the previous forecast of underlying earnings of $395 million and $405 million this financial year, Flight Centre is now forecasting underlying profit before tax of between $360 million and $390 million.
Managing director Graham Turner said the outlook for Australia was uncertain.
“While we expect solid contributions from our overseas businesses, which in profit terms have consistently grown at 20 to 30 per cent per annum in recent years, the growth outlook for the larger Australian business is currently unclear,” he said in yesterday’s statement.
Mr Turner said leisure sales growth in Australia had been lower than usual over the first five months of this financial year, leading to weaker margins, and sales staff had been forced to reduce commissions in order to lower overall ticket prices and stimulate demand.
Mr Turner said he still expected solid contributions from its overseas operations, including those in the UK and the US, but the growth outlook for its core Australian operations was unclear.
"When we set our full-year growth targets in August, we expected the uncertainty surrounding Australia’s federal budget would have abated as the first half drew to a close and consumer confidence and spending would have started to rebound," he said.
"Unfortunately, we are yet to see tangible signs of a full recovery and the overall leisure travel market in Australia continues to be flat year-on-year."
The total transaction value, or the price at which goods and services are sold, from Flight Centre’s Australian business is up just 2%, which is significantly lower than the compound annual growth rate of 10% that it has achieved over the past five years.
Flight Centre and Mr Turner rejected market talk the weaker profit is a result of the fall in the value of the Aussie dollar.
Flight Centre said Australians typically responded to currency movements by upgrading or downgrading travel plans at their destination, rather than by avoiding overseas travel altogether.
"We continue to see healthy customer enquiry in Australia and attractive holiday offers, particularly internationally, with the International Air Transport Association last week flagging a 5 per cent drop in global airfare prices," Mr Turner said.
Flight Centre also said the falling dollar was helping boost its overseas profits, which had been growing at 20%-30% a year in recent years.
Mr Turner in fact placed the blame for the decline firmly at the feet of the Commonwealth budget.
"When we set our full year growth targets in August, we expected the uncertainty surrounding Australia’s federal budget would have abated as the first half drew to a close and consumer confidence and spending would have started to rebound," he noted in the statement.
"Unfortunately, we are yet to see tangible signs of a full recovery and the overall leisure travel market in Australia continues to be flat year-on-year."
