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Fevertree - lockdown to hit sales

Nicholas Hyett, Equity Analyst | 22 April 2020 | A A A
Fevertree - lockdown to hit sales

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Fevertree Drinks plc Ordinary 0.25p

Sell: 2,052.00 | Buy: 2,056.00 | Change -25.00 (-1.20%)
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Fevertree Drinks' full year revenue reached £260.5m in the year ending 31 December 2019, 9.7% ahead of the same period last year. Growth was driven by the US, Europe and the Rest of the World (RoW), whilst UK sales fell 1.1%.

Full year earnings per share fell 5.5% to 50.26p. Management has proposed a final dividend of 9.88p per share, bringing the full year's payment to 15.08p.

The shares rose 4.3% in early trading.

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Our view

Fevertree's full year results made for ugly reading. Falling sales in the UK will inevitably spark fears the gin boom has turned to bust, while guidance for weaker sales in the US and lower margins undermine Fevertree's long term pitch - that it can replicate its success across the pond.

'On-trade' sales, meaning pubs and restaurants, make up about 45% of the group's sales and that's where the damage from COVID-19 is being felt. We can expect a significant fall in sales, although the group hasn't said exactly how big.

The current disruption could bring to an end a run of spectacular growth, with sales up from just £34.7m in 2014 to £260.5m this year.

Fevertree has benefited from significant operational gearing during the good times. It outsources most of its operations - think bottlers and distributors, and that gives the group flexibility and makes expansion cheaper. A lean operating model means profits drop straight through to cash for shareholders or to reinvest to fund growth. Unfortunately that works in reverse too. If sales fall, profits will fall by more, and this could be especially unpleasant this year.

The problem is exacerbated by Fevertree's past successes. Expectations are high, and while year-on-year revenue growth of 9.7% would be music to the ears of most consumer goods groups, Fevertree's premium rating means investors demand more of it.

The good news is that US sales are moving forwards, and that's crucial. It looks like explosive UK growth is over - there's a limit to how much premium tonic you can sell and it looks like Fevertree is approaching it. The US is an untapped market by comparison, and the group's investing heavily to try and secure a piece of it.

But although Fevertree retains an excellent business model, very strong brand and solid balance sheet, we think the next few years could be a struggle. North American 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. International rivals will have learnt from Schweppes' failure in the UK and be better prepared.

The decision at the full year to maintain the dividend is a major vote of confidence in the coming year, and also reflects a sizable net cash position. The group currently offers a prospective yield of 1.2%. However, if the lockdowns go on long enough pressure will start to mount.

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Full Year Trading Results

The UK still accounts for just over 50% of sales at £132.7m. Sales shrank slightly as the group lapped a particularly strong summer in 2018, which included a world cup, royal wedding and exceptionally hot weather. 'On-trade' sales, meaning pubs and restaurants, grew 5% over the year, while 'off-trade' sales fell 7%, largely as a result of retailer de-stocking.

US sales rose 33.0% to £47.6m, making Fevertree the fourth biggest mixer brand in the country. The group is cutting its prices to drive further sales, but still intends to be at the premium end of the market. So far, the results of this initiative have been encouraging. The group has signed a new deal with a West Coast bottling partner that should further support growth.

European sales rose 16.0% to £64.4m, reflecting an acceleration during the second half of the year. Progress was particularly strong in Spain, Germany and Italy, while the group maintained its market leadership in more established markets like Benelux, Ireland and Denmark.

Sales in RoW rose 31.7% to £15.8m, with good progress in Australia and Canada.

The group's gross margin fell 1.3 percentage points to 50.5%, largely thanks to falling revenue in the UK, higher prices for glass bottles and Brexit uncertainty. The group expects margins to fall further as prices are cut in the US.

The largest contributor to increased operating costs was marketing spending, which rose 36.7% and now accounts for 11% of revenue. Lower margins and increased costs meant profit before tax fell 4.1% to £72.5m.

The impact of COVID-19 on the group's business, especially in the 'on-trade' channel, is currently unclear. However, 2020 started well with both the US and UK trading in line with or ahead of expectations.

Fevertree finished the year with no debt and £128.3m in cash, which has increased since then.

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