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Why this broker just downgraded Blackmores (ASX:BKL) shares to a sell rating

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The Blackmores Limited (ASX: BKL) share price is trading lower on Monday morning.

At the time of writing, the health supplements company’s shares are down over 1.5% to $76.62.

Why is the Blackmores share price falling?

Investors have been selling down the Blackmores share price on Monday following the release of a broker note out of Goldman Sachs.

According to the note, the broker has downgraded the company’s shares to a sell rating with a $75.20 price target.

This suggests potential downside of approximately 2% from where the Blackmores share price is trading right now. This compares to the broker’s coverage average of +27%.

Why did Goldman downgrade its shares?

Goldman was pleased with Blackmores’ performance during the first half and notes that management is “executing well against its strategic plan.”

However, this is coming at a cost, with the company spending heavily to rebuild its brand in existing markets and launch into new markets. In light of this, it suspects that the company’s earnings will be under pressure in the near term.

Goldman said: “BKL is delivering in line with its strategy, on track for A$55mn in annualised cost savings by FY23 as a result of operational efficiency. It is investing in growth markets and prioritizing new product innovation and digital. Near-term outlook remains mixed: we expect diversification of geographic and channel footprint to benefit the International business and the China business should grow in line with the channel underpinned by targeted investments in China e-commerce. Expansion into new markets (i.e. India) will impact margins in the near-term, albeit we expect BKL to execute in a measured manner.”

“Despite the strategy broadly on track, we downgrade our rating to Sell, with higher near-term reinvestments resulting in a subdued earnings environment,” the broker concluded.

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