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Fevertree - soaring costs put pressure on margins

Half year revenue rose 14% to £160.9m, led by Europe but reflecting growth across all regions. Bar and restaurant sales showed...

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Half year revenue rose 14% to £160.9m, led by Europe but reflecting growth across all regions. Bar and restaurant sales showed 'promising' signs of a recovery and consumer demand remained strong. As a result, revenue guidance of £355-£365m for the full-year remains intact.

However, cost headwinds have 'significantly worsened in recent months', specifically relating to freight and glass costs. First half gross margin is expected to be around 37%, though that's forecast to fall by the full year mark, to around 33-35%.

Full year cash profit (EBITDA) is now expected between £37.5-£45.0m, down from £63-£66m.

The shares fell 27.9% following the announcement.

View the latest Fevertree share price and how to deal

Our View

Just when we thought Fevertree was back on the right track, news that costs are significantly higher than expected has been met with a nasty market reaction. This isn't the first time this year that profit guidance has been lowered, despite demand remaining healthy.

We'd been hoping US freight costs would start to come down and the recovery of more profitable bar and restaurant sales would help push margins in the right direction. That's not been the case.

It's true, some of the rising costs are outside Fevertree's control. The price of glass, which makes up 30% of total costs, has doubled this year along with increased costs across a range of other ingredients. But the group's reliance on shipping to the US is an area that's been focused on, and we're a little disappointed by progress.

New bottling partnerships across the pond were expected to ramp up production in the first half, but labour shortages scuppered those plans. Not only did that mean US demand couldn't be fully met but shipping from the UK had to ramp up despite 50% higher freight costs. Longer term it's a good move, but benefits need to start making their way through to margins sooner rather than later.

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 that link has weakened a touch.

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

The UK is back to modest growth, while new flavoured soda launches and marketing tie-ups with spirit manufacturers are helping sales in the US and Europe. It's worth noting that the group is benefiting from very weak comparators - in 2020 many customers were shut and several of those that were open were running down existing inventory rather than buying more stock. But still, underlying growth looks healthy in both Fevertree's core and growth markets.

However, despite the recovery, 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 and Europe.

Overall, Fevertree has a strong brand and broader consumer trends are supportive of the company's products. 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 coming down this year, the stock still trades on a very high valuation. We struggle to get too excited at this level while margins and profits move in the opposite direction to sales.

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.

Half Year Trading Update (ignoring the effects of exchange rates)

UK revenue grew 6% to £53.5m, driven by a recovery in bar & restaurant sales. Sales in shops decreased 21%, as demand re-balanced following the prior year when lockdowns were in effect.

In the US, demand remained strong, and revenue grew 9% to £40.1m. Labour shortages and port congestion meant inventory wasn't high enough to service demand. Increased reliance on shipping from the UK meant the group was more exposed to freight costs, which have increased 50% this year. Sales from both shops and bars & restaurants have increased since 2019.

European revenue rose 31% to £52.4m, driven by the recovery of bar & restaurant sales in Southern Europe. Progress continues in shop sales as premiumisation trends across the region work to the group's favour.

Rest of World revenue grew 5% to £15.0m as the group gained market share in Australia and Canada.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 15th July 2022