By Katharina Bart and Ole Mikkelsen
ZURICH/COPENHAGEN, Nov 17, 2014
(Reuters) – The world’s largest maker of hearing aids Sonova posted disappointing first-half profits and a share buyback half the size of what was expected, worrying investors about its strategy of boosting market share by making deep discounts.
The Staefa, Switzerland-based company’s recent deal to sell high-end hearing aids at rock bottom prices via U.S. warehouse club Costco Wholesale Corp stepped up a price war in the fiercely competitive $15 billion market for hearing healthcare.
It also alienated independent shops that were Sonova’s traditional outlets and angered its competitors: Danish rival William Demant slashed its full-year targets last week, blaming Sonova’s deal with Costco – which accounts for 10 percent of all devices sold in the U.S. private market according to estimates by Bernstein Research.
Now the Swiss company looks as though it may also have damaged itself by the Costco deal: Not only is it having to woo back the independent shops that turned their back on its brands following the U.S. partnership, but analysts believe it will now be hard for Sonova to meet its full-year sales targets.
Sonova’s net profit rose 6.1 percent to 173.6 million Swiss francs ($180.63 million) in the first half, lower than expectations for 183 million francs in a Reuters poll of analysts.
It said it still expects full-year sales to grow by 7-9 percent and earnings before interest, tax and amortisation (EBITA) to increase by 11 to 15 percent in local currencies.
But Bernstein Research analyst Lisa Bedell Clive wrote: “We see no conceivable way that Sonova can hit consensus full-year expectations, and thus we expect earnings downgrades in the coming days.”
In a note to investors she rated the stock at underperform with a target of 115 Swiss francs, and also pointed out that Sonova’s plan to buy back 500 million Swiss francs ($522 million) of its own shares in the next three years was only half of what Bernstein had expected.
By 1321 GMT, Sonova shares had fallen 1.4 percent to 145 francs – investors disappointed also by its announcement that it would only lift its dividend ratio to roughly 40 percent of its earnings from 37 percent.
“This has been an eye opener for the whole industry that a leading hearing aid maker decided to sell its premium brand via a low cost retail chain,” said Morten Imsgaard, an analyst with Danish Sydbank.
While Siemens, GN Resound, and Demant all sell through Costco, hearing aid makers have typically reserved their lower-end devices for discounters. Sonova has changed that by selling a premium brand – Phonak – through the discounter, which comes at the expense of independent audiologists and so-called shop in shops, typically found in opticians or pharmacies such as Boots.
Sonova, which is also struggling to convince investors it can find success with a new range of hearing aids that connect to mobile phones, said it was debt free and had funds to invest in research and acquisitions.
It also said the strong Swiss franc against the U.S. dollar, euro and Canadian dollar shaved 30.2 million francs off first-half sales. It expects this impact to ease in the second half. (1 US dollar = 0.9611 Swiss franc) (Reporting By Katharina Bart and Ole Mikkselsen. Additional reporting by Caroline Copley in Zurich and Stine Jacobsen in Oslo; Editing by Sophie Walker)