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Fevertree Drinks - sales stall in lockdowns

Nicholas Hyett, Equity Analyst | 28 January 2021 | A A A
Fevertree Drinks - sales stall in lockdowns

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Fevertree Drinks plc Ordinary 0.25p

Sell: 2,507.00 | Buy: 2,511.00 | Change 2.00 (0.08%)
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Fevertree's full year revenue fell 3% to £252.1m, with a substantial decline in UK sales, partially offset by strong growth in the US and Rest of the World. Revenue is ahead of previous guidance, so while margins deteriorated profit will be ahead of previous expectations.

While sales in bars and restaurants have been disrupted, retail sales have surged. Management expects some of this to unwind as conditions normalise, and has "confidence" in the group's position moving forwards.

The shares rose 5.0% in early trading.

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Our view

Before Coronavirus, falling sales in the UK sparked fears the gin boom had turned to bust. Meanwhile guidance for weaker sales in the US and lower margins undermined Fevertree's long term pitch that it can replicate its success across the pond.

However, the disruptive effects of the coronavirus outbreak mean it's difficult to see whether those trends are continuing. Bar and restaurant sales usually make up about 45% of the group's sales and that's where the lockdowns hit. While there's been an encouraging upswing in sales from retail partners, sales have fallen overall. That said, sales still grew in the US, which is encouraging.

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 to reinvest to fund growth. Unfortunately that works in reverse too.

The recent acquisition of a German bottling partner is an interesting departure from that model.

Management thinks it will be cheaper to buy the current distributor than build out Fevertree's own capacity, which makes sense. It does increase the size and organisational complexity of Fevertree a little, but that's to be expected as the group grows.

However, GDP also generated EUR10m in 2019 distributing third party premium beers and spirits. Fevertree intends to keep doing this, which marks a departure from the existing business model. It's only a small bolt on and to be honest we hope it stays small. It can be risky when businesses divert their attention away from core competencies.

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. In order to keep making progress international expansion is key, particularly in the US. It's a comparatively untapped market, 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 a sturdy balance sheet, we think the next few years could be a struggle. North American tastes are geared towards dark spirits like Whiskey and Rum. That 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 to grow the dividend is a major vote of confidence in the coming year, and also reflects a sizable net cash position. However, if bar and restaurant sales remain subdued or the vaccines aren't as successful as hoped the group's growth plans could be set back even further.

Fevertree key facts

  • Current 12m forward P/E ratio: 45.8
  • Average 12m forward P/E ratio since floating in 2014: 47.0
  • Prospective yield: 0.8%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full year trading update

Fevertree's UK sales fell 22% to £103.3m, reflecting a 60% decline in sales from bars and restaurants. Retail sales grew 20%, and Fevertree finished the year as the "clear market leader" with a 40.1% market share. The group says it has maintained strong relationships with its bar and restaurant partners, and is "well placed to benefit" as society reopens.

US sales grew 23% to £58.5m, and full year retail sales grew 57% after a strong second half. Price cuts and sustained marketing spending continued to attract new customers. Fevertree has recently signed a deal with a new West Coast bottling partner, which management expects to ramp up production and reduce transport and logistics costs.

European revenue rose 1% to £65.3m, which management described as "resilient" given Southern Europe's reliance on bars and restaurants. The group has managed to trade through Brexit with minimal disruption thanks to its dedicated EU supply chains.

Sales in the Rest of the World grew 58% to £25.0m, reflecting strong growth in the key Australian and Canadian markets.

Balance sheet cash has increased 12% over the year to £143m.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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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