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The Science of Hitting
The Science of Hitting
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An Update on National Beverage

A look at the company's fiscal 2019 results

June 27, 2019 | About:

I wrote an article about National Beverage (FIZZ), the company housing the LaCroix sparkling water brand, back in March. Here’s what I said in the conclusion of that article:

“I don’t have much else to say about the company at this point. LaCroix has reported some impressive results over the past five years, but the road ahead looks bumpier. In addition, there doesn’t appear to be much value or growth in the company’s other brands (they still account for a significant percentage of the business). At $60 per share, FIZZ trades at roughly 20x forward earnings. I plan on watching how this plays out, but an investment isn’t in the cards at this time.”

Since then, the stock has continued to be under pressure. It recently closed at $42 per share and is down by two-thirds from the highs reached in September 2017.

On Wednesday, the company reported financial results for the fourth quarter of fiscal 2019.

For the quarter, revenues declined 2% to $240 million, with gross margins falling more than 500 basis points to 35%. For the full year, revenues increased by 4% to $1.0 billion. As shown below, the pace of revenue growth greatly slowed in fiscal 2019:

This reflects a significant slowdown in volume growth for the company’s Power+ Brands (primarily the LaCroix brand, which National Beverage acquired in 1996):

The company’s success has attracted competition, and it’s not hard to see why: In addition to the incremental $300 million in annual revenues that National Beverage has generated over the past three years, the company consistently generates roughly 20% operating (EBIT) margins and a return on assets north of 30%.

But while LaCroix is still the leading brand of sparkling water in the U.S., they are under threat from formidable competitors like PepsiCo (PEP), Coca-Cola (KO) and Nestle (NSRGY). The company is also facing competition from private label offerings from retailers like Kroger (KR). In National Beverage’s 10-K, it stated that they pride themselves on being “smaller, faster and stronger” than these competitors because they can “respond faster and more creatively to consumer trends than competitors who are burdened by legacy production and distribution complexity and costs.” All I’ll say is that it looks like they have some work to do in the years ahead if they still want investors to believe that this reflects reality (it’s worth noting that volumes for the company’s Power+ Brands declined again in the fourth quarter).

Looking the bottom line, we can see that earnings per share declined slightly in fiscal 2019. After years of explosive growth, National Beverage has hit a lull (which explains why the price-earnings multiple has contracted from nearly 40 times earnings to a multiple in the mid-teens):


This chart from a recent Wall Street Journal perfectly captures the problem for National Beverage.

The company is still the category leader, but has lost roughly six points of share in the past year. If it can’t change that trajectory, the financials could get ugly. On the other hand, if it can stabilize the business in North America and find new opportunities for growth (like a planned introduction of LaCroix products in the U.K.), the company could start heading back in the right direction.

For me, this investment falls into the “too hard” bucket. I’ll continue to follow the situation because it interests me, but it’s highly unlikely that I would invest in National Beverage.

Disclosure: None.

Read more here:

An Update on Kroger

The Value of Best-in-Class Management

The Value of 'Willful Agnosticism'

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About the author:

The Science of Hitting
I desire to own high-quality businesses for the long-term. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with the top five positions accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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