By now, you probably know about sparkling-water cult brand LaCroix, produced by National Beverage (FIZZ -0.40%). What you may not know is that CEO Nick Caporella writes the company's press releases, and they're just as colorful as the cans his company produces.
While the stock has had an amazing run over the past few years, National Beverage currently sits roughly 40% below its all-time highs reached last year. But Caporella is having none of it, lashing out at those who dare doubt National Beverage's destiny to become king of the beverage industry. Here are three things Caporella wants everyone to know.
Image source: Lacroixwater.com.
1. On haters
For a high-growth cult brand, National Beverage's 16.9% revenue growth last quarter may have underwhelmed many. Management did note that severe winter weather in the East delayed shipments to certain regions.
Whether you buy that excuse or not, the company's Power+ Brands segment, which contains LaCroix, did grow at a strong 38%, and it's safe to say LaCroix probably grew faster than that. Gross margins also expanded from 39% to 40.1%, and pre-tax income grew 25%, displaying terrific operating leverage.
But if you remain a skeptic who dares to rain on the so-so quarter, Caporella has words for you:
Throughout these past five years, we have repeatedly identified all of the authentic circumstances pertaining to the sustainability of our brand growth and performance ... most especially, brand LaCroix. Due to its phenomenal prospects, we are questioned constantly about sustainability. The results included in this report further confirm our operating logic.
Shakespearean.
2. On tax accounting
If you've been following this earnings season, you've probably noticed some large adjustments made to many companies' earnings. That's because deferred tax assets and deferred tax liabilities on company balance sheets have to be adjusted due to the new corporate tax rate.
But while tax reform will boost National Beverage's profits, apparently Caporella found the accounting work just too onerous to stay silent:
While I certainly believe that the new tax code is beneficial for American enterprise, I may have desired alternative methods to report our stated results. We manage our consumer products and our investor business with focused dedication and passion. We believe in our philosophy and its proven results and continuously modify our business plan ... to adjust for this tax modification was more than uncomfortable.
I'm not exactly sure how onerous tax accounting affects National Beverage's business plan, and just about every public company I've looked at has done these types of accounting adjustments without any complaints. The complaints may be due to National Beverage having such a small, tight-knit group of executives running the show, and not possessing teams of accountants taking care of this unexciting work.
In fact, the company actually doesn't compensate its main executives directly, but rather pays a subsidiary called Corporate Management Advisors (CMA), Inc., which is paid 1% of company revenue; this company in turn pays Caporella and the company's CFO.
CMA has been a point of contention among short sellers, specifically Glaucus Research, which believes the company may be using the subsidiary to hide costs. There's no evidence of that, and it could just be another quirk of owning a closely held company that's run like a family business. Still, it's something for investors to be aware of.
3. On posers
Finally, the recent Academy Awards broadcast saw the premiere of PepsiCo's (PEP 1.65%) commercial for Bubly, its new sparkling water brand (which appears to pretty much be a LaCroix rip-off). While looming competition has always been one of the biggest bear arguments, Caporella doesn't believe these posers can touch the anointed LaCroix:
Over the years, I have witnessed most major players in the carbonated soft drink (CSD) business educate retailers on 'How to make less – Profits!' These same players are now trying to do the same in the true sparkling water segment. But, today, the concerned retailers are rebuking these harmful efforts to destroy their opportunity to continue sustaining the high growth/better margin of the sparkling water segment. Additionally, they have resisted compromising this authentic, healthy segment of their business – with rigorous diligence. ... Advantage LaCroix!
This is interesting, actually, as it appears to be a warning to retailers about working with large beverage companies, insinuating that working with them would be less profitable for the retailer than LaCroix.
Splits between consumer packaged goods companies and retailers are often done through private negotiations and not disclosed, but since LaCroix doesn't have to recover large advertising budgets, as Pepsi does, it might be able to afford to give the retailers a good-sized cut of profits (though I'm only speculating). Caporella is apparently making the case that giving Bubly prime shelf placement over LaCroix risks messing with a good thing.
For all his quirks, Caporella has a lot to say about the industry he's helped shape. If nothing else, he gives investors tired of boilerplate press releases something refreshing to read.
