Freedom Foods (ASX: FNP) has given an update and outlined some writedowns.
What is Freedom Foods?
Freedom Foods is a food company that was started in 1986 with a focus on making nutritious and healthier food and beverages. It started with products in soy, rice milks and breakfast drinks. Some of its brands include Freedom, Milk Lab, Crafted Blends, Messy Monkeys, Australia’s Own, So Natural, and Goodness.
What did the company announce?
The company has recently announced the departure of its chief financial officer (CFO) and then two days ago it was announced that CEO and Managing Director Mr Rory Macleod is on leave pending another announcement that is expected to be made next week. Mr Perry Gunner has been appointed Executive Chairman.
Inventories
Freedom Foods continues to review its inventory levels and carrying value of inventory. After an an initial review announced on 29 May 2020, there was an initial estimate for a writedown of around $25 million.
However, further analysis since then has suggested further writedowns are necessary for obsolete stock, out of date stock and withdrawals, dating back from the current year to 2017. This amounted to an additional $35 million, bringing the FY20 writedown to $60 million. There will be further analysis done.
Freedom Foods is also reviewing inventory held outside Australia. At 31 May 2020, the value of inventory outside of Australia was $2 million.
The company also said it has become aware that the initial estimate did not include inventory write-offs related to FY20 product withdrawals and deletions and accounting matters relating to costs of goods carried forward as a capital item that should have been included as cost of sales. Freedom Foods said it requires further investigation.
Doubtful debts
The company had also previously announced it expected to provision approximately $4 million for bad debts for an export account.
However, another review has shown that a further negative adjustment of approximately $10 million is needed.
The company also said it may be necessary to include adjustments to the timing of the recognition of revenue that was reported in prior periods and debtor balances in the balance sheet.
Summary
This is clearly a complicated matter that may take some time to be resolved. The company’s shares are suspended from trading whilst these investigations take place.
If the share is heavily sold off then there could be a contrarian opportunity, but it’s not the type of thing I’d want to go for in the current environment. There could be more bad news in the coming weeks, particularly in the full year result. For a consumer product share I’d rather buy Bubs (ASX: BUB).
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Disclosure: At the time of writing, Jaz doesn’t own shares in any of the businesses mentioned.
