Shares in small-cap consumer goods company Innovaderma(LSE: IDP) slumped by as much as 25% in early deals this morning after the company reported what can only be described as an extremely impressive first-half trading statement.
Specifically, the company said that trading in the first half of its financial year was "encouraging" with revenue rising by 80% year-on-year in constant exchange rates. However, while the company seems pleased with its first-half performance, it looks as if the market was expecting much more from the group.
For the first half of Innovaderma's financial year, management believes revenue was £3m on a constant currency basis, which indicates that the group may miss City forecasts for the year. The City is currently expecting full-year revenue of £6.6m, so Innovaderma's second-half performance will have to pick up significantly to hit this target.
What's more, the trading update from the company today revealed that the group will book some exceptional one-off costs during its first half, which will weigh on profitability. Costs associated with listing the business on the Main Market of the London Stock Exchange, launching products in the US and moving production to the UK, will all hit full-year profits.
Still, the company has some wiggle room as analysts are expecting 48% year-on-year earnings per share growth. If sales for the full year come in marginally below expectations and one-off costs dent profits, on an adjusted basis, the group is still set to report healthy earnings growth. Analysts are currently expecting earnings per share of 4.9p for the year ending 31 June 2017.
Hard to value but on the right track
As an early-stage growth company, it's difficult to value Innovaderma without considering the company's prospects. Even though the company may miss its targets for this financial year, if the group can continue to grow sales at a rate of 80% year-on-year, within two to three years annual sales could be over £34m, 150% of the company's current market capitalisation.
So far, there's no reason to believe that the firm cannot hit this lofty target for growth. Over the past few months the company, which makes at-home treatments for hair loss, self-tanning and skin rejuvenation, has struggled to keep up with demand for its products. In mid-December, management had to ask shareholders for more cash to increase stock levels at a faster pace than expected to meet product demand -- an extremely positive development.
But like early-stage growth companies, Innovaderma will have growing pains, and the costs revealed today are just part and parcel of any business's growth trajectory. These costs may dent profitability in the short-term but they're already starting to pay off. The launch of products in the US has undoubtedly helped drive sales growth and by listing on the Main Market, Innovaderma should find it easier to raise capital and gain more trust from investors.
The bottom line
Overall, today's update may be disappointing in the short term, but it shows the company is on the right track and near-term costs should be easily offset by long-term sales growth.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.