(Bloomberg Opinion) -- LaCroix sparkling water’s Nick Caporella says the brand’s recent sales stumble is the “result of injustice!” But the subsequent plunge in parent company National Beverage Corp.’s shares has more to do with an overvalued stock and investors’ outsize expectations than unfair persecution. And more market justice is likely headed National Beverage’s way.
Late Thursday, National Beverage reported that its quarterly sales for the three months ended in January had dropped slightly. That was the first time that’s happened in five years. It marked a setback for a company that had been growing like gangbusters, thanks to the runaway, word-of-mouth success of its quirky seltzer LaCroix, which comes in colorful cans and offers flavors like pamplemousse that embrace it’s French-looking name. (In reality, the beverage originated in Wisconsin, is named after the St. Croix River and, like the river, is pronounced with an “oy” at the end.)
In the past five years, revenue at National Beverage, which also sells the orange drink Shasta, has soared 58 percent; its earnings have shot up nearly 200 percent. Along the way, Caporella, National Beverage’s CEO, has consistently made grandiose statements about the success of his company. In over-the-top, and sometimes slightly bonkers, press releases, Caporella has touted his company’s achievements as the product of management genius, glorious supply-chain management and breakthrough innovation.
This week’s earnings report pokes holes in that narrative. In fact, sales growth has been slowing for a while now, despite Caporella’s claim as recently as December that its log of orders showed that “normalcy is returning.” National Beverage’s success wasn’t the result of any genius or innovation, but basic economies of scale, helped along by a cultural fad.
Back in mid-2017, there were already signs that Caporella and National Beverage were having trouble managing accelerating shipping and marketing expenses, and that profits would soon slow, as I noted here. On Thursday, here’s how Caporella explained the company’s latest disappointing results:
We are truly sorry for these results stated above. Negligence nor mismanagement nor woeful acts of God were not the reasons – much of this was the result of injustice! Managing a brand is not so different from caring for someone who becomes handicapped. Brands do not see or hear, so they are at the mercy of their owners or care providers who must preserve the dignity and special character that the brand exemplifies.
While Caporella didn’t say what he meant by “injustice,” National Beverage has been hit by accusations and a shareholder lawsuit that its beverages aren’t as natural as it says they are, a claim it disputes. In October, Caporella said in a press release that the only thing enhancing the flavors of the beverage was “love and caring” and a sense of “Innocent” every time you open the can. “Nose Sensory, Aroma, Tongue Sense, Measured Taste and Mouth Feel . . . How we use and develop each of these ‘senses’ relative to all of the above is proprietary,” Caporella said.
To be sure, Caporella does deserve some credit for seeing the potential in LaCroix, which was mostly unknown outside of the Midwest when National Beverage acquired the brand in the early 2000s. And the rise of National Beverage shares to as high as $126 in 2017 was in part based on strong profit growth. But it was also fueled by unrealistic expectations. Investors are to blame here, too. They appear to have gotten ahead of themselves, but Caporella certainly fanned their expectations.
At their height, the company’s shares reflected a price-to-earnings ratio of 50. That’s a level typically befitting a technology company. The company’s shares have now plunged 56 percent to $57. Even at that price, National Beverage’s P/E valuation is 17. That’s probably still too high for a seltzer slinger with a growth rate that is now back in the single digits.
One of the most basic jobs of a CEO is to set the proper expectations. The job of a board is to police that. The more-than-arms-length relationship between executives and their public shareholders requires that. The fact that the company’s stock is plunging now isn’t injustice. It is exactly the opposite.
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Stephen Gandel is a Bloomberg Opinion columnist covering banking and equity markets. He was previously a deputy digital editor for Fortune and an economics blogger at Time. He has also covered finance and the housing market.
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