Exchangeable water-system seller Primo Water
- Would gross margins improve? Gross margins had fallen in each of the last four quarters, all the way from 29.6% in Q4 2010 to 22.4% in Q4 2011. Investors were looking for a turnaround in this number but unfortunately they didn't get it, as it dropped all the way to 16.1%. Management addressed that concern on the earnings call, saying that margins were crunched from expediting FlavorStation, transitioning regional operators, and pursuing aggressive pricing. They believed that gross margin would improve by the second quarter and would stabilize in the mid-20s.
Any good news on FlavorStation? Rollout delays in FlavorStation had mostly destroyed any opportunity the new offering had to capitalize on the holiday season, and have been one of the major reasons Primo's stock has deflated; Investors had been highly anticipating the SodaStream
competitor. The product launched in over 500 Lowe's (Nasdaq: SODA) stores in the past quarter, and management said Lowe's was pleased with its performance. The FlavorStation will roll out in additional Lowe's locations in Q2. Still, management is guiding FlavorStation sales in the range of only $15 million to $17 million for 2012, the bulk of which will come in the second half of the year. With numbers like that, it's unlikely to be a serious competitor to SodaStream -- which posted near $300 million in sales last year -- anytime soon. (NYSE: LOW)
- Can they keep up with the strong guidance? Going into the earnings call, analysts had been projecting a $0.26 EPS, giving Primo a promising forward P/E of just 11. However, management unsurprisingly lowered guidance, saying it expects 2012 revenue in the range of $118 million to $126 million, an increase of 40% to 50%, and GAAP EPS of breakeven to $0.03 or Non-GAAP earnings of $0.07 to $0.12 per share. (Analysts tend to use Non-GAAP EPS.)
The revised guidance is likely the culprit behind the stock's post-earnings dive. Still, at today's prices shares are trading at a P/S ratio of about 0.65, a level usually reserved for slow-growth, low-margin businesses. With a ratio like that, the upside potential certainly remains strong for Primo, and its FlavorStation is not the only product posing a threat to competitors. Unveiling a new Flex series of water dispensers with built-in single cup coffee brewers, CEO Billy Prim took the first shot across the bows of Green Mountain Coffee Roasters
With additional revenue streams from FlavorStation and the new coffee brewing system, Primo could be a steal at today's prices. I'm still hesitant after the recent rollout flops, however, and I'd like to see management improve margins and deliver on some of its promises before I buy in.
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