You have to give Cott (NYSE: COT) some credit for at least keeping its word. Management warned investors to expect a disappointing quarter, and the results released last Thursday lived up to that prediction. The company struggled through another tough period, with earnings down 38% to $0.07 per share.
Rising commodity prices for aluminum and the sweeteners used to make its drinks were the major culprits. Additionally, management's slow reaction time in raising prices in response to these increasing supply costs worsened the situation. And while the company introduced higher-priced, higher-margin drinks late in the quarter to stay current and competitive, I think it was a little too late.
On the positive front, Cott is hedging aluminum prices. But again, the light bulb there turned on a little too late. Management said it's taking the "right actions" to improve the situation, but investors should note that the company is only hedging aluminum prices in the short term. If aluminum keeps rising in the longer term, the company can expect higher prices down the road.
Remember those boring economics charts showing the law of supply and demand? The company's latest quarter followed one particular economic notion: As prices rise, volumes sold decline. While the company believes that it's implementing effective strategies to improve performance, its price hikes caused volume to fall 6%. Even though total revenue only fell 1%, it actually benefited from a favorable currency translation. Excluding the currency advantage, revenue dropped 3%.
Cott is a major supplier to Wal-Mart (NYSE: WMT), which accounted for 38% of total revenue last year. The Bentonville Behemoth is known to squeeze its suppliers to keep prices low for its customers. I doubt Wal-Mart will take a price hike lying down.
Management claimed product rationalizations -- a fancy way to say it is ditching lower-margin products -- also contributed to the top line declines and margins would presumably increase. However, this was not the case. Gross margin was 12%, falling from 13.9% in the year-ago period, primarily because of higher packaging and ingredient costs.
Cott has also introduced energy drinks and non-carbonated beverages such as ready-to-drink teas, bottled water, and sports drinks, which are growing faster than its carbonated ones, and have higher margins. But, here, too, Cott faces a host of competitors, such as Lipton Iced Tea, sold in partnership with PepsiCo (NYSE: PEP), Gatorade (marketed by Quaker Oats, another division of PepsiCo), POWERade, made by Coca-Cola (NYSE: KO), and many others. So while it's expanding its product line, can Cott really keep up with the big boys?
Based on competitive pressures and company statements, it's possible the entire company could get sold. Management has stated, in vague terms, that is has held "discussions with parties interested in industry consolidation." But it is careful to also mention how it is focused on performing as a stand-alone company. Those are conflicting messages, but it certainly seems like Cott could potentially put itself on the block.
Rumored suitors include Cadbury Schweppes (NYSE: CSG) and Blackstone. Cott has been pruning costs, recently announcing $8 million in expected savings from job cuts. Under the circumstances, and given the well-established and well-financed competitors it's facing, a quick sale may just be the ingredient needed to save this company.
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Fool contributor Larry Rothman is happy to receive feedback, and promises to read it when not being wrestled by his three children. He doesn't have any positions in the companies mentioned.
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