January 2018 ushered in a corporate marvel of focus that we believe not only defies the beverage giants' power and might, but finds that its creativity and innovation transformed the entire soft drink industry!
That epic line was penned by National Beverage (FIZZ 1.39%) CEO-turned-wordsmith Nick Caporella in the company's recent annual report (the company fiscal year ends in April).
Do you know what "a corporate marvel of focus" is? Me neither. But while Caporella's sterling prose may draw the ridicule of some (and provides fodder for short-sellers), National Beverage's financials have been deadly serious, with the company's stock up a whopping 350% in just the past three years.
While National Beverage has a broad portfolio of beverage brands, it's clear LaCroix has been the reason for the company's enormous surge. But with the stock up so much and naysayers abounding, some might wonder if the company's best days are behind it.
Here's why I don't' think so.
Image source: Lacroixwater.com.
Power+ powering returns
Frustrating for some investors is the fact that National Beverage doesn't break out LaCroix sales specifically, instead lumping them in with its Power+ group of brands. Power+ signifies the company's "healthy" drink brands, meaning non-soda brands. These include LaCroix, Shasta sparkling water, Rip It energy drinks, Everfresh juices, and Mr. Pure. The company also has two carbonated soda brands, Shasta and Faygo, which comprise the company's carbonated soda segment.
In fiscal year 2018, Power+ case volume grew an eye-popping 38.9%, which is impressive coming off the 42.6% growth of fiscal 2017. That powered (excuse the pun) National Beverage's overall growth, which accelerated to 18% versus 17% last year.
|
National Beverage Segment |
FY 2018 |
FY 2017 |
|---|---|---|
|
Power+ case volume Growth |
38.9% |
42.6% |
|
Carbonated soda case volume growth |
(6.2%) |
0.0% |
|
Total case volume growth |
19.8% |
16.6% |
|
Revenue growth |
18.0% |
17.3% |
Source: National Beverage 2018 Annual Report. Chart by author.
As you can see, while Power+ has slightly decelerated, it has clearly become a larger overall part of the business. Therefore, overall case volume is accelerating, as is revenue (though by a smaller amount, likely due to lower prices of sparkling water versus soda).
One other wrinkle is that National Beverage actually discontinued its low-margin private label soda business in the third quarter of 2018, leading to that 6% drop in soda case volume. So absent this intentional discontinuation of the private label soda business, revenue growth would have been even better in 2018.
Overall company case volume and revenue should gravitate toward the Power+ growth rate as it becomes a larger part of the business. That gives National Beverage a good shot at maintaining its overall growth trajectory for the next few years.
LaCroix makes you fat ... margins!
The story gets better though, because not only is LaCroix becoming a larger part of the business, it's also higher margin. Gross margins expanded to 40.1% in 2018, up from 39.4% in the prior year, despite a 1% increase in the costs of aluminum. Pre-tax income surged 26.2% in 2018, well above the company's overall 18.0% revenue growth rate.
This is all likely due, again, to Power+ brands, because these brands don't require extra ingredients such as sugar or corn syrup. It's really the best of both worlds for National Beverage, as LaCroix is both catching fire with consumers while also being relatively simple to make. That's a recipe for National Beverage's extremely high return on equity, which clocks in at a huge 56% over the trailing 12 months.
Power+ takes over
Power+ brands, specifically LaCroix, are taking over more and more of National Beverage, which is why the market is so bullish on the company's prospects. A sustained high growth rate, combined with operating leverage, should lead to even better profit growth in the years ahead as consumers continue to switch to healthier sparkling water over soda.
