Fevertree blames British weather for revenue guidance cut

Premium tonics supplier Fevertree Drinks (FEVR) concocted a very mixed set of half-year results. The company delivered its highest ever market share by value in the UK, boosted sales by 40 per cent in the US, and raised its cash profit margin guidance for next year above the market consensus to 15 per cent. But full-year revenue guidance was cut from a range of £390mn-£405mn down to £380mn-£390mn, which management pinned on “the vagaries of the British summer weather” and its change in Australian distribution model. And the huge slide in pre-tax profits was driven by continuing cost headaches as the asset-light business model remains under pressure in this high-inflation environment.

Growth across the Atlantic far outstripped postings elsewhere, although a £3.3mn exceptional charge resulting from production headaches took some of the shine off the US performance. Revenue was up just 1 per cent in the UK to £53.8mn, with off-trade sales flat. There was better news in Europe, where the top line grew by 7 per cent to £56.1mn as share was taken from other premium brands. Revenue in other international markets fell by over a third to £9.6mn because of an inventory buy-back in Australia and the refresh of the business set-up there.

Cost headwinds remain a painful thorn in the company’s side. Analysts at investment bank Liberum pointed to double-digit percentage increases in packaging, ingredients and filling fees. Management highlighted “materially elevated glass costs”, a big issue considering around 80 per cent of the company's sales rely on glass bottles. It is hoped that a potential new contract for glass supply will bring down costs significantly in 2024, but this remains to be seen. 

The impact of all of this was seen in the 670-basis points contraction in gross margin to 30.7 per cent in the half, with price increases unable to fully pick up the slack.

But, on the plus side, there is evidence of some softening of cost pressures. Falling energy and freight costs helped the company reiterate its gross margin guidance range of 31 to 33 per cent for the full year, and the bump in cash profit margin guidance was a welcome surprise.

We mused in June “whether retail investors will be as willing as Fevertree’s customer base to pay a premium for a quality product” and raised the question of whether a recommendation upgrade is in order. 

As things stand, the answer is no. The premium forward earnings valuation of 47 times, according to the consensus view on FactSet, is too punchy given outlook volatility. Hold.

Last IC View: Hold, 1,121p, 22 Mar 2023