2023-08-29 04:57:04 ET
Summary
- National Beverage's Q4 net sales reached a record $287 million, showing resilience in a tough macroeconomic environment.
- National Beverage's growth has been stagnant, with sales only growing by 15.7% over the past four years, barely keeping up with inflation.
- The ease with which a new brand was able to burst into the scene shows there is little economic moat for La Croix.
I wrote about National Beverage ( FIZZ ) nearly 3 years ago. At that time, I gave the company a "neutral" rating. FIZZ stock has performed largely in line with the S&P 500. In this article, I am revisiting my thesis and giving an update.
National Beverage can weather the macro-economic environment
National Beverage’s just ended its fiscal year this June making it easy to compare its yearly and quarterly results. The company’s Q4 Net Sales was a record $287 million. However, this was only a slight increase from the $284 million in the same quarter last year.
These Q4 results ensured that the company had decent results for fiscal 2023 . I was initially surprised by these results as the company has been operating in a tough macroeconomic environment. This is especially true for the fast-moving consumer goods industry (“FMCG”). National Beverage has had to contend with the dual challenge of inflation and a slowdown in consumer spending. Inflation would increase costs via the raw materials of the products. While a reduction in spending would impact the revenue side.
Despite these risks, in the fiscal year of 2023, the company actually increased its revenues by 3.1% from $1.138 billion to $1.173 billion. Digging a bit further, the increase in revenue was due to an 8.4% increase in average selling price which offset a slight decline in volume. What this shows to me is that National Beverage’s products have a strong enough brand that price hikes are able to be passed on to the consumer.
On the expenses side, National Beverage’s average cost per case rose by 13.4%. This resulted in overall Gross Margin declining for the year from 36.7% to 33.8%. The company had to contend with increases in the cost in packaging, ingredients, and freight. However, the company has shown good cost discipline in these difficult times. SG&A expenses were basically flat at $210 million.
The increase in Sales offset the decline in margins. The company ended fiscal 2023 with Net Income of $142 million or $1.52 EPS compared to $158 million Net Income or $1.72 EPS the year prior. I believe that with inflation beginning to stabilize, fiscal 2023 results should be the “floor” of what we can expect as far as results go from National Beverage.
National Beverage Growth is Stagnant
In my previous article on National Beverage nearly three years ago I said this ;
While I believe that LaCroix has established a strong enough brand presence that it can compete with much larger firms, a more crowded field could put some pressure on future sales.
I got a lot of pushback on my comments during that time as La Croix was near the peak of its popularity. However, looking at how sales played out the last 4 years it seems that I was largely correct. In 2019, the company had $1.014 billion in sales compared to $1.173 billion in 2023. This was a growth of 15.7% or roughly 4% per annum.
While sales growth of any kind is better than a decline in sales, this level of growth barely keeps up with inflation. At the time there were many people convinced that La Croix could eventually reach the status of Coke ( KO ) or PepsiCo ( PEP ). In a worst-case scenario reach the level of Monster ( MNST ).
I believe the answer to that question as I highlighted in my previous article is competition. That and the young audience tend to be extremely fickle with fads. Take for example how the brand "Liquid Death" overtook La Croix to be the top canned water for the younger generation.
For Gen Z water connoisseurs, Liquid Death has become a cult favorite. The punky, counterculture drink, sized like a tall boy and adorned with a melting skull, has drawn droves of fans on social media. Its TikTok account is the most followed beverage brand in the US on the platform, at 2.9 million followers, while its Instagram boasts 1.3 million.
From bonappetit
The main success of Liquid Death is in its marketing to the younger audience via TikTok and Instagram ( META ). The same forces that are propelling Liquid Death were the same forces that made La Croix so popular only a few years ago.
The ease with which a new brand was able to burst into the scene shows there is little economic moat for La Croix and the other Seltzers. It used to take a considerable amount of resources to build a brand. However with how things can go viral so quickly now it can be done much cheaper. Not helping National Beverage is that the competition is very intense within the Seltzer space. San Pellegrino, Bubly and Schweppes are all vying for a piece of this market.
Valuation
What makes the performance of National Beverage disappointing is that EPS has barely grown since 2019. In 2019, the company's EPS was $1.50, it hit a peak of $1.86 in 2021 and has now fallen to $1.52 in 2023. The company currently does not pay a Dividend and has not been buying back a meaningful number of shares.
In other words, FIZZ has not been returning any value to its shareholders and has not produced any meaningful growth to show for it. Therefore I do not believe that the company justifies trading at a lofty premium of 28x earnings. I don't necessarily think FIZZ stock will fall from here. However, I believe its upside is limited.
For further details see:
National Beverage: Earnings And Growth Starting To Fizz Out