Healthy brand image has helped National Beverage (NASDAQ:FIZZ) outgrow entrenched soda giants over the last few years, particularly through its simply flavored sparkling water products. But that image asset was challenged recently by a lawsuit that alleged that LaCroix beverages aren't as natural as the company claims.

In third-quarter results issued this week, National Beverage said that the lawsuit, which executives call unfounded, did impact sales trends over the last few months. However, growth appears to have picked back up to normal in recent weeks.

Let's take a closer look.

The raw numbers

 Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$261 million

$244 million

7%

Net income

$41 million

$34 million

25%

EPS

$0.88

$0.72

28%

Data source: National Beverage.

What happened this quarter?

Sales growth slowed notably but remained in solidly positive territory. National Beverage also reported a jump in selling expenses, partly related to scaled up marketing spending.

A woman drinks sparkling water from a glass.

Image source: Getty Images.

Here are the key highlights of the quarter.

  • Sales increased 7% to mark a deceleration from the prior quarter's 13% spike. The company started the year off with an 18% revenue increase, even with 2017's full-year results. Gains have slowed considerably since then.
  • National Beverage managed healthy increases in both sales volume and average selling prices, which allowed gross profit margin to tick up to 39.7% of sales from 39.4% a year ago.
  • Selling expenses rose at a faster rate than sales as the company spent more on distribution and on marketing. This resulted in operating profit of $52 million, or 20% of sales, compared to $51 million, or 21% of sales, last year.
  • Lower tax expenses helped net income jump 25% to significantly outpace revenue gains.

What management had to say

CEO Nick Caporella was characteristically colorful in his comments about the quarter. "The outrageous and unfounded lawsuit filed on Oct. 1st," he said in a press release, "severely affected shareholder value." The LaCroix brand, he continued, "has suffered declines" along with the broader sparkling beverage industry.

Executives said that the worst appears to be behind the company, though, and that order trends have just recently bounced back. "Today, our daily order log reflects that normalcy is returning to our company," Caporella explained.

Looking forward

Even so, National Beverage is taking the brand challenge seriously and is looking at new marketing campaigns aimed at bolstering LaCroix's image as a healthy product that's free from artificial ingredients and flavorings. Investors can expect such moves to push selling expenses higher and at least temporarily reduce bottom-line profitability as they did in the third quarter.

As for sales growth, shareholders will have to wait until National Beverage's next quarterly update for confirmation that its demand trends are heading back up toward the 18% spike that the company achieved in 2017. After all, negative press surrounding its ingredient claims might not be the only factor holding demand down lately.

The good news is that rising volume and pricing metrics suggest that its beverage portfolio is still outpacing the broader industry. But given the sales slowdown, investors will be watching these figures closely over the next few quarters as they try to gauge the long-term impact, if any, that National Beverage's brand hit has had on its growth prospects.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends National Beverage. The Motley Fool has a disclosure policy.