Join our community of smart investors

On The Beach hamstrung by hedging strategy

The online holiday retailer warned that profit would miss expectations due to currency movements
On The Beach hamstrung by hedging strategy

Shares in On The Beach (OTB) sunk after the company announced that currency-related troubles would cause the online holiday retailer to miss full-year profit expectations. The company blamed weakness in sterling - which has lost value against the Euro as a no-deal Brexit becomes more likely - for increasing its prices and thereby undermining its ability to give competitive offers. The crux is that On The Beach does not use any currency hedging techniques, whereas its tour operator competitors do, which helps to insulate their prices from currency fluctuations.

IC TIP: Buy at 386p

The choice not to hedge currency is part of On The Beach’s low-cost business model - the practice entails significant costs and may well be suited to larger operators in the holiday market. Analysts at Peel Hunt point out that not hedging sterling sometimes puts the company at a disadvantage relative to tour operators. This has left it unable to gain increased market share without denting margins, and the company has chosen to preserve the margin by reducing volumes rather than compete on price, with currency-linked price rises passed on to customers - hardly an ideal scenario given the widespread discounting we've witnessed in the travel market this year.