Aryzta AG (ARYN SW) issued a profit warning this week, the third warning in just under a year and half and its stock price has fallen over 28% in the last two days. The Swiss maker of frozen bread dough is experiencing higher input costs (butter and flour) and labor costs that they are unable to pass along to consumers. Several analysts have downgraded the stock and, according to Jonathan Fyfe of Mirabaud, are questioning its “long term viability”.
Aryzta AG short interest is $364 million, 23.7 million shares shorted or 26.5% of its float. Aryzta is the fourth largest short in the European Packaged Food & Meats Sector, behind Marine Harvest (MHG NO), Nestle SA (NESN SW) and Groupe Danone (BN FP). Although it is not the largest European short in the sector, it is the most profitable short of the group, up $429 million, +85.10%, in mark-to-market year-to-date profits in 2018. This follows a year-to-date mark-to-market loss of $34.4 million, -8.06%, in 2017 when most shorts missed the 32% price drop after their January 24th profit warning. In the week after the profit warning announcement short interest increased by a third, from 7.6 million shares to 10.1 million shares, and continued building till it reached 14.0 million shares by year end. Unfortunately for the new shorts, Aryzta’s stock price recovered by $10.65/share, +36.8%, for the rest of the year.
A year after Aryzta’s first profit warning they lowered their EBITDA guidance on January 25th, 2018 which resulted in a 20% drop in price and another influx of short selling. Short selling increased by six million shares and short sellers made $168 million in mark-to-market profits.
Short sellers continued to build their positions in the troubled bread maker, with short interest hitting its historical high of 24.5 million shares, or $535 million, in late March. There has been some short covering over the last two months as some short sellers realized profits, but short sellers are still holding on to their convictions with short interest at 23.7 million shares. With Aryzta’s price dropping over 26% on its latest guidance cut on the 24th, short sellers made $136 million in mark-to-market profits in just two days.
Analysts point to Aryzta’s large debt load, lack of pricing power, currency exposure and increasing product input costs affecting profitability to the point of threatening debt covenants. Recently, Aryzta’s CFO said the company may be forced to sell assets or dilute its shareholder base by issuing more stock in order to generate working capital.
If Aryzta fails to reverse its four quarter revenue decline, short sellers will continue to build their positions and McDonalds may have to find another source for its sesame seed buns.
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Managing Director Predictive Analytics, S3 Partners, LLC
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