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A Quick Look at National Beverage

- By The Science of Hitting

National Beverage (FIZZ) has been in the headlines lately after a difficult third quarter caused the stock price to fall precipitously. While the results have softened lately, a look at National Beverage's financial results over the past decade shows just how impactful growth in the sparkling water category - and specifically growth for the LaCroix brand - has been for the business.


As you can see, revenue growth was relative tepid prior to 2015. But over the past three years, we've seen a significant change in the growth trajectory, with revenues climbing from $646 million in 2015 to $976 million in 2018 - a compounded annual growth rate (CAGR) of 15%. Growth has been driven by the company's Power+ Brands (primarily LaCroix, which National Beverage acquired from beverage company Winterbrook in 1996): In 2016, 2017 and 2018, Power+ Brands volumes were up 31%, 43% and 39%, respectively. As a result of this growth, LaCroix has become a material driver of the company's financial results (Laurent Grandet, an analyst at Guggenheim, estimates the brand accounts for nearly 50% of the company's sales).

In addition to top-line growth, National Beverage has seen significant margin expansion. Gross margins, which were consistently in the low-to-mid 30s a few years ago, were 40% in 2018. Operating margins, which were previously in the low double digits, have nearly doubled to 21% (notably, leverage has largely come from expenses outside of marketing costs). And net margins, which were 7% - 8% from 2010 to 2015, were 15% in 2018. As shown below, the combination of mid-teens revenue growth and material margin expansion has resulted in a substantial increase in earnings per share (EPS) over the past three years.

But it looks like National Beverage is starting to lose some of its luster. In the most recent quarter, revenues declined 3% to $221 million (through the first nine months of the fiscal year, revenues increased 6% to $774 million). Notably, volumes for the company's Power+ Brands declined 6%. This was offset by the carbonated soft drinks business, where volumes were flat.

As noted in the quarterly filing, management believes that the decline for the Power+ Brands was attributable to "widespread media coverage of litigation regarding the marketing and labeling of LaCroix." The company is facing a lawsuit that questions its "all natural" product claims. While it has since refuted those claims, it appears that the negative media attention is still having an impact on the business (consider this headline from a USA Today article: "LaCroix faces lawsuit for allegedly including cockroach insecticide ingredient in its sparkling water").

In addition to negative headlines, the company is facing competition. Outsized growth has attracted the big boys (Nielsen estimates that the category has grown by more than 50% over the past four years, with trailing 12-month sales of $2.2 billion). For example, PepsiCo (PEP) launched a line of sparkling water last year (Bubly), in addition to extensions for the Aquafina brand. Coca-Cola (KO) has also invested in the space over the past few years, with products like DASANI Sparkling (launched in 2014), smartwater sparkling (launched in 2016) and Topo Chico (acquired the U.S. rights in 2017 for $220 million). These investments have given Coca-Cola some traction, with its North America sparkling water portfolio posting 20% volume growth in 2017. In addition, Nestle (NSRGY) is expanding flavors on its Perrier and San Pelligrino product lines. Finally, National Beverage faces competition from other emerging beverage companies like Hint (over $100 million in annual revenues) and Spindrift. All that competition is having an impact on FIZZ: During the four-week period ended Feb. 24, National Beverage held a 15.2% share of U.S. flavored seltzer sales in IRI measured channels - a decline of more than 300 basis points from the year-ago period. Continued success for LaCroix - and for National Beverage - will be dependent on its ability to differentiate from the herd.

A long-term bet on National Beverage requires faith in Nick Caporella, the company's chairman and CEO (he also owns more than 70% of the company). From my perspective, this appears to be a one-man show. But considering that Caporella is 82 years old, that may not be the case for long. Some speculate that the next generation (namely Caporella's son Joseph, who has been employed at National Beverage for 30 years) would like to sell the company if given the opportunity. It's also worth noting that the company has only five members on its board of directors, including Nick Caporella , Joseph Caporella and three other individuals who are all over 75 years old.

Finally, National Beverage has an odd arrangement where Caporella receives compensation equal to 1% of the company's annual revenues (that payment is inclusive of the CFO's pay as well). Suffice it to say that this company isn't exactly an exemplar of corporate governance.

I don't have much else to say about the company at this point. LaCroix has reported impressive results over the past five years, but the road ahead looks bumpier. In addition, there doesn't appear to be much value or growth in the company's other brands (they still account for a significant percentage of the business). At $60 per share, National Beverage trades at roughly 20x forward earnings. I plan on watching how this plays out, but an investment isn't in the cards at this time.

Disclosure: None.

This article first appeared on GuruFocus.