Shares of LaCroix purveyor National Beverage (FIZZ 56.32, -11.95, -17.50%) are tumbling after the company reported weak third quarter results
The company missed estimates on the top and bottom line for the second quarter in a row. Net sales fell (2.8%) for the first time in years.
Branded case volume fell 4.1% including a 5.8% decline in volume of Power+ Brands, which includes the company's flagship LaCroix brand. Management believes the decline in Power+ Brands is principally due to widespread media coverage of litigation regarding the marketing and labeling of LaCroix. The net sales decline also reflects the discontinuance of lower-margin, private-label carbonated soft drink business in the third quarter of Fiscal 2018.
Chief Executive and Chairman, Nick A. Caporella, has consistently included some unusual commentary in the earnings reports. The title of last night’s press release was: "We Just Love Our LaCroix" Consumers Chant. The text of the release started with: “We are truly sorry for these results stated above. Negligence nor mismanagement nor woeful acts of God were not the reasons – much of this was the result of injustice!” This likely refers to the company’s excuse for weak sales regarding media coverage of claims that LaCroix contained unnatural ingredients.
While media coverage of lawsuits claiming that LaCroix contains unnatural ingredients was the company's primary excuse for the poor results, increased competition in the sparking water category also seems to be a factor.
LaCroix was sort of a pioneer in the explosion of the sparkling water market. The brand was in a sweet spot as the trend toward healthier beverages took off. LaCroix's unique flavors and its marketing focus on social media helped accelerate the brand's success with millennials.
Sales were growing in the double digits, which led to speculation that a large consumer packaged goods company, starved for growth, would acquire the company. The highly shorted stock with a small float surged despite the company's lackluster disclosures (the company does not break out Lacroix sales). Adding fuel to the fire, the erratic Chief Executive Nick Caporella owns a super-majority of the stock. Over 70% of the stock is owned by Mr. Caporella. Meanwhile, more than 20% of the tiny 12 million share float was recently sold short.
Recently, the sparkling water market has been flooded with copy cats. LaCroix remains a popular brand but increased competition in the canned water market comes as no surprise. As a result, National Beverage has quickly become one of the cheapest consumer packaged goods stocks after being one of the most expensive less than a year ago.
The stock traded with an EV/EBITDA multiple well over 20x in 2017 and 2018. With a ~$2.6 billion valuation, the stock now trades at ~12x EV/EBITDA versus the average CPG stock closer to 15x.
Estimates calling for sales growth to accelerate toward 10% in fiscal 2020 appear to be aggressive given heightened competition in the space.
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