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Fevertree - mixed results, UK sales slip

Fevertree saw full year revenues increase by 11% on last year, to £344.3m.

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Fevertree saw full-year revenues increase by 11% on last year, to £344.3m. This includes a 2% revenue decline from its core UK market. Performance was held back by rail strikes in the run up to Christmas, which reduced bar and restaurant sales. There was a 13% increase in US sales, ignoring the effect of exchange rates.

The group expects to deliver full-year underlying cash profits (EBITDA) of roughly £39m, in-line with expectations. Fevertree acknowledged ongoing challenges from ''significant global inflationary cost pressures''.

Looking forward, Fevertree expects revenue to be £390m - £405m, representing growth of roughly 13% to 18% in the 2023 financial year. This reflects the impact of higher European energy costs, which the group is particularly exposed to as around 80% of its sales are in glass bottles.

The shares were unmoved following the announcement.

View the latest Fevertree share price and how to deal

Our View

Fevertree enjoyed double-digit revenue growth in all regions except the UK last year. As the group's biggest market, investors weren't too happy to hear that widespread train strikes in the run up to Christmas put a lid on growth.

All else being equal, this should be a temporary blip. But there are some other challenges.

The cost of glass is being highlighted as a particular concern. Energy prices are a big input cost in making glass bottles, and when 80% of your sales are bottled in glass, any fluctuation in energy prices is bound to have a material impact on your costs. While European energy prices have recently pulled back, they're still at least three times higher than they were back in 2021.

At the moment, the group's reliant on shipping so that it can service its US customers. New bottling partnerships across the pond were expected to ramp up production in the first half of 2022, but labour shortages scuppered those plans. These issues, first flagged in the July 2022 trading update, are slowly being resolved but until US production ramps up, a dark cloud over investor sentiment is likely to linger.

Fevertree's operating model has also come under pressure. Outsourcing most of its operations (think bottlers and distributors) is a benefit in normal times and a large portion of profits drop straight through to operating cash flow. However, a significant increase in inventory over the last couple of years to combat supply chain pressures has been a drain on cash and we saw an operating cash outflow in the first half of 2022.

Looking at the broader picture, there are some positives to consider.

New flavoured soda launches, marketing tie-ups with spirit manufacturers, and the addition of new corporate customers are helping sales in the US and Europe surpass pre-covid levels. Underlying growth outside of the UK looks healthy, however, a prolonged period of economic weakness and an increasingly embattled consumer could put a stop to that.

Explosive UK growth seems to be 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 and Europe.

Overall, Fevertree has a strong brand and broader consumer trends are currently supportive. And the group's net cash position is a bonus. But in the short term, the group needs to get a tighter grip on costs so margins can start to move in the right direction again.

Despite the material downgrades to consensus earnings estimates by analysts, the stock still trades on a very high valuation. We struggle to get too excited at this level while margins and profits stall.

Fevertree key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 26th January 2023