Cigars International Woes Force STG to Downgrade Guidance

Scandinavian Tobacco Group A/S (STG), the parent company of General Cigar Co. and Cigars International, has issued a revised guidance for investors revealing that 2017 will likely be worse than expected.

For the second time this year, the company has indicated that a new IT infrastructure at Cigars International, the world’s largest retailer of cigars, is causing problems for the bottom line. The guidance issued today shows that STG believed the issues would be resolved by now, but it now expects them to last into the second quarter and “normalisation” to not occur until the third quarter.

“As earlier communicated, the implementation of a new IT infrastructure in Cigars International has impacted our online and catalogue retailer’s ability to process orders and to run campaigns and promotions to customers,” read the guidance.”

In February, Cigars International upgraded its IT infrastructure system, the immediate results of which were disastrous.

Cigars International processes thousands of orders per day and the company has said that the new system prevented them from not only seeing orders, but also seeing customer emails complaining about the orders. As such, many customers experienced lengthy delays in orders while Cigars International was unable to address and respond to complaints. These issues persisted for weeks, sometimes months and according to the guidance, are at least in some capacity still affecting the company’s business today.

“Our goal was to provide an even higher level of customer service for you,” said Craig Reynolds, president of Cigars International/evp of global handmade cigar businesses, in a video on April 3. “We replaced our legacy system with two state of the art systems: a new (enterprise resource planning) and (warehouse management system). Unfortunately when we launched there was some significant bugs in those systems and we did not catch it in time and it quickly snowballed and created the kind of delays that you are experiencing.”

As for the specifics, net sales for STG in the quarter were 1.379 billion DKK ($206.77 million), an organic growth of negative 9.5 percent. EBITA, earnings before interest, taxes, and amortization, was 201 million DKK ($30.14 million).

The company’s new guidance suggests that there will be negative sales growth and a negative EBITDA of 4-8 percent compared to a previous estimate of flat sales growth and a positive EBITDA of 1-3 percent.

“As previously guided, we delivered negative net sales and EBITDA growth in the first quarter due to the implementation of the new IT infrastructure in Cigars International and current total market development in machine-made cigars,” said Niels Frederiksen, ceo of STG, in a statement. “We work diligently to resolve our issues in Cigars International that are of a temporary nature. Despite this set-back we remain confident in our business model and we continue to focus on cost optimisation and investing in our brands and future growth opportunities.”

In a separate announcement, Franklin Templeton acquired 5.01 percent of the company’s shares.

STG is traded on the NASDAQ Copenhagen. It closed at 124 DKK ($18.59) about two hours before the guidance was issued.