Odwalla Gets Juiced Up

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By Rick Aristotle Munarriz (TMF Edible)
November 27, 2000

Odwalla Inc.

Ticker: (Nasdaq: ODWA)
Phone: �650-726-1888

Website: http://www.odwalla.com/
Price (11/24/00): $10.94

How Did It Double?

"Odwalla came through the people of the Sun to warn them of the vanished legions and to teach them how they may increase their bounty through the practice of the drum and silent gong."
��-- "Illistrum" by Malachi Favors � �

Vanished legions? Increased bounty through steady drumwork? The lyrics to the song that inspired the Odwalla moniker two decades ago oddly enough sum up the past few years for the beverage company.

Selling premium-priced fresh-squeezed juices, the hip company had it all in 1996. Unfortunately, it also had an E.coli outbreak in a batch of apple juice that October. More than three dozen drinkers got sick from the tainted juice. In one tragic case, a 16-month-old toddler died. �

The company was quick to pull the product -- all the product -- off the shelves. It was just as well. The Odwalla brand that had become a yuppie and health conscious staple on the West Coast was not likely to win back patrons anytime soon.

So went the vanished legions. Drinkers backed off first. Shareholders followed them out. It wasn't until fiscal 1999 that Odwalla was able to grow back sales above the 1996 levels. New products. A new acquisition in Fresh Samantha. A return to profitability. It was the practice of the drum -- the silent gong -- that kept the company together and restored consumer confidence.

The drinkers came back first. Shareholders followed them in.

Business Description

Odwalla was founded 20 years ago by three musicians. They started the company to help fund their melodic pursuits -- with a hand juicer and a crate of oranges in a shed behind their house (hey, sounds like how the Fool got started, minus the citrus). Naturally they turned to the power of music for inspiration. The name Odwalla comes from the hero in a musical piece performed by The Art Ensemble of Chicago.

Beyond the ever-growing juice lines, the company also distributes spring water, meal replacement Future Shakes, and energy bars. In May, the company closed on its purchase of Fresh Samantha.

Financial Facts

Income Statement
12-month sales:�$93.5 million
12-month income:�$3.1 million
12-month EPS:�$0.43
Profit Margin:�3.3%
Market Cap:�$121.4 million

Balance Sheet
Cash:�$5.4 million
Current Assets:�$28.3 million
Current Liabilities:�$16.6 million
Long-term Debt:�$1.8 million


How Could You Have Found This Double?

Back in 1997 we took a look at Odwalla's fall from grace in a Daily Trouble feature. We turned to history for answers. Four years earlier, Jack in the Box (NYSE: JBX) had its own bacterial nightmare when undercooked burgers also came to fatal results.

It took more than two years for the shares of the fast food chain's parent company, Foodmaker, to recover. Patrons fled initially. It's only a natural gut reaction that has plagued even the best of brands like Tylenol and Coke (NYSE: KO) in the past. But if the company tackles the calamity head on, eventually, consumers come back. So it took two years for the burgermeisters at Jack in the Box. As fate would have it, it was two years later that Odwalla began showing sales growth again, turning the tide towards the end of 1998.

But while the top line was marching forward again, the bottom line got chop blocked. An unusually cold winter in the company's home state of California sent the price of citrus products soaring. For a juice maker like Odwalla, trying to build on its newfound momentum, the last thing it wanted to do was raise already premium prices in an effort to pass the citrus freeze costs on to the end user. So it took the hit. But at least this one only came with red ink, not a black cloud.

The weather always changes. There was no reason to believe that the compacted margins would linger beyond the effects of the cruel winter. So, sure, Odwalla didn't announce its return to profitability until this summer. However, it was clear that the company was heading in the right direction by the end of last year -- even if the stock was starting to dip below $5 a share.

Where to From Here?

Coming from the East Coast, the Odwalla tragedy came as a sad tale about an unfamiliar brand to me. While the company had been expanding its distribution reach over the years, it had yet to move out of its West Coast stronghold.

Fresh Samantha? Well, that brand I know well. When Odwalla announced it would be buying up the privately held premium juice and smoothie maker back in April (completing the deal a month later) I was able to relate. Fresh Samantha resides on refrigerated East Coast shelves.

The deal is huge for Odwalla. Overnight, Odwalla became a major player on both coasts. The synergy is already beginning to spin its margin magic as sales are outpacing the joint company's operating costs.

Estimates for this new fiscal year now stand at $0.32 a share. That's including the non-cash accounting impact of the Fresh Samanta amortization. In other words, the company is set to generate quite a bit more cash flow than the bottom line would indicate. It's a bright future for the people of the Sun. Who would have thought that a silent gong can compose such an endearing melody?

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