In an unscheduled trading update ahead of full year results Fevertree reported that, while growth continues in all regions, growth in the core UK market has slowed to around 2%.
Fevertree now expects total revenue of £266m - £268m this year, representing 12-13% growth, with margin expectations unchanged.
At the time of writing, the shares were up 5.8%.
UK drinking habits have changed - we're opting for long drinks rather than just wine and beer for post-work and weekend tipples. And artisan spirit drinkers are happy to pay a bit more for Fevertree's higher end accompaniment.
Sales growth has been impressive - increasing from £59m in 2015 to £237m last year. Its huge popularity has been reflected in the share price too - it's almost 11 times higher than when the company first listed in 2014.
But sales growth alone doesn't make a business. What stands out about Fevertree is its operating model. The group outsources most of its operations - think suppliers, bottlers and distributors, and that gives the group flexibility and makes expansion cheaper. A lean operating model means profits drop straight through to cash. That can then be returned to shareholders or reinvested to fund growth.
Unusually for a fast growing company, Fevertree offers a dividend. A prospective yield of 1% might not be huge, but has the potential to grow if all goes well.
But problems are bubbling to the surface. UK growth has started to falter, as the group's started to brush up against the edges of the tank. Even with the gin boom and Fevertree's marketing machine, there's a limit to how much premium tonic you can sell.
That puts extra pressure on Fevertree's international divisions. The market with the most untapped potential is the USA, where a trend towards more premium drinking habits is starting to catch on. The most recent trading update was reassuring on this point, with sales up 34%. Unfortunately US tastes are geared towards dark spirits like Whiskey and Rum, which puts Fevertree's ginger ales and colas centre stage - and the competitive landscape there is crowded. After all, consumers order a rum and coke, not a rum and cola.
The shares currently trade on 29 times expected earnings. That's lower than it has been in the past, but still well above its peers. It's impossible not to be impressed by Fevertree's growth to date, but in order to justify that rating, we think Fevertree needs to see a sustained taste for tonic take off stateside. There is a little evidence of that, but we're waiting for more.
Full year trading update
Fevertree said UK sales growth from off licences and supermarkets were behind expectations. That reflects a slight decline in market share, to 38%, and a slowdown in overall consumer spending. However, performance in pubs and restaurants was more positive. Fevertree now expects around 2% growth in the UK as a whole for the full year.
The USA has enjoyed a strong second half performance, with sales coming in ahead of management's previous expectations. Growth for the region is now expected to be around 34% for the year, and group has entered a partnership to start bottling on the West Coast in 2020.
In Europe a strong second half is expected to see full year sales grow around 19%, while Rest of the World sales rise 35%.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
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