If Cott (NYSE: COT) investors had taken a sip of their Sam's Choice cola every time they heard management utter the word "disappointing" over the past 12 months, they would have each gained 20 pounds and suffered massive stomachaches.
The company's financial results have been enough to give even the steeliest of investors indigestion, as Cott's stock price has sunk from $16 a year ago to less than $3 today. Surprising absolutely no one, interim CEO David T. Gibbons labeled Cott's first-quarter 2008 performance "disappointing."
Expectations for Cott were low, because of company-specific struggles, but also because of great difficulty in the North American carbonated-soft-drink market, seen in Coca Cola Enterprises' (NYSE: CCE) flat first-quarter results. And Cott still managed to disappoint. Although revenue declined just 3% compared to the year-ago period, volume declined 15%. Weak top-line results combined with increased commodity costs compressed Cott's gross margin by almost 300 basis points to 10.5%, and swung the company to a $12 million operating loss in the quarter compared to income of almost $16 million the year before. Earnings per share of negative $0.29 will not quench any investor's thirst, and cannot be tolerated for long in any viable enterprise.
Though terrible, the company's financial results were not the most troubling aspect of this morning's release. It had been previously disclosed that Cott would lose shelf space for its private-label carbonated soft drinks at major customer Wal-Mart (NYSE: WMT), which accounts for 40% of Cott's sales. This shelf space is being reallocated during the second quarter 2008, and while the impact will be meaningful, management could not quantify the hit. Yikes!
The company's management turmoil also became quite obvious on the earnings conference call. Former CEO Brent Willis was terminated March 24 after a truly disastrous tenure. Interim CEO Gibbons seems a good fit because of his experience with private-label medicine maker Perrigo (Nasdaq: PRGO), but a few comments that Gibbons made during the earnings conference call should make investors extremely nervous.
First, Gibbons assured everyone that he was treating his position as CEO as "full-time" and not "part-time." I'm so glad to hear that he's not treating this as some sort of weekend hobby! Any time this sort of assurance is necessary from a CEO, interim or not, I think there is a major problem.
Also, Gibbons said that, "over the coming weeks and months, I'll continue to dig into the details of our business." Yikes again! Doesn't sound to me like he is exactly hitting the ground running. To make this all the worse, Gibbons also said that, "I will not hesitate to make major changes to our strategies and how we are operating." Whaaa? He has to assure us that he's not part-timing his CEO role and that he is still learning the details of the business, but he will not hesitate to make dramatic changes to the company. That's a pretty scary combination for any investor to swallow!
I think that there is a place for Cott in the American beverage landscape, and that the company will be able to return to modest operating profitability over the long run. This will likely make it a good value pick at some point, but I'd wait for more managerial stability and a quantification of the hit from Wal-Mart before swigging back the shares.
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