Australia Markets closed

Flight Centre shares torpedoed on profit downgrade

Tom Richardson
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The Flight Centre Travel Group Ltd (ASX: FLT) is likely to plunge in trade on Friday after the group downgraded its full year 2019 profit before tax expectations to between $335 million and $360 million, compared to prior guidance between $390 million to $420 million.

Taking the mid-point of both sets of guidance this is the equivalent to around a 14% profit downgrade that will displease investors given the company now has a regular track record of downgrading its own profit guidance across fiscal years. In other words serious investors are now likely to place little reliance on the guidance given going forward given it’s commonly too optimistic.

The company blamed the result on the “the challenging trading climate in Australia” seemingly across the retail leisure travel sector, with much softer-than-expected total transaction values (i.e. ticket sales).

Soft consumer spending is no secret in Australia with car dealers like AP Eagers Ltd (ASX: APE) also reporting that consumers are holding back spending on big ticket items most likely because of weakening household balance sheets on the back of falling house prices in Sydney and Melbourne in particular.

Aside from what must be an especially weak domestic leisure travel sector management also blamed the downgrade on “decreased interest income following the recent cash payment of $211million in fully franked dividends, higher interest payments, increased global technology expenses, merger and acquisition costs and additional transformation costs (consultant fees and redundancy payments).”

The bright side is that the group reported its U.S. and U.K. businesses are performing well, with it on track to post record profits in both countries, while it also reported the corporate travel sector is performing strongly.

Overall the business retains a very strong balance sheet and excellent long-term track record of growth under its founder Graham Turner, but it’s domestic bricks-and-mortar business model faces problems.

Others in the travel sector that may come under selling pressure today as a result of the news include Webjet Limited (ASX: WEB) and Corporate Travel Management Ltd (ASX: CTD).

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Motley Fool contributor Tom Richardson owns shares of Corporate Travel Management Limited and Webjet Ltd.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Corporate Travel Management Limited and Flight Centre Travel Group Limited. The Motley Fool Australia has recommended Webjet Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019