Weber shares could tumble more than 65% from here as sales weaken, Citi says in downgrade

Published Wed, Aug 17 20227:38 AM EDT

Weber is under fire as consumers are pulling back on discretionary spending amid high inflation and macroeconomic uncertainty. It also has a concerning liquidity position that could worsen, according to Citi. The bank downgraded shares of the grill maker to sell from neutral and slashed its price target to $2.75 from $7 in a Tuesday note. The new target price represents a 67% downside from where shares closed at $8.47 Tuesday. "Given the headwinds facing consumers, the demand environment for grills looks like it will remain challenged for some time to come," Chasen Bender wrote in the note. "Indeed, also following the period of strong demand during COVID, management has suggested that FY23 sales could look similar to FY19 ($1.30 bn), which would represent a 21% YoY decline to our FY22 estimate and is far more than we had previously expected," Bender added. Fanning financial flames While Weber has announced multiple strategic initiatives to boost sales, it may take some time to see any impact, according to Bender. At the same time, Weber's profitability is facing headwinds including fuel surcharges and an unfavorable foreign exchange backdrop. "Although we expect the $75 mm of EBITDA-related cost improvement will drop to the bottom line, we cannot entirely discount the possibility that some of these savings will need to be reinvested," said Bender. Bender is also concerned about Weber's deteriorating financials. At the end of the third quarter of the company's 2022 fiscal year, it had about $41 million in cash and access to a $300 million revolving credit facility, of which $48 million was drawn, according to the note. "While management is confident that the company will have sufficient liquidity through FY22 given its existing cash balance, its CFO, and revolver, we are concerned about the company's liquidity position in FY23," Bender wrote. Given Citi's expectation that sales and profitability will remain under pressure, the company could see its leverage position fall further, meaning it may need to raise capital to avoid violating its credit agreement. "Although management has indicated that they are committed to working with its creditors, admittedly we are not sure what the outcome would look like in this scenario," said Bender. —CNBC's Michael Bloom contributed reporting.