Fevertree's profits plunge as costs bite

Fevertree’s (FEVR) July update flagged the cost pressures that are weighing down the company’s margins, so the confirmation of their impact on the half-year results came as no surprise. More detail was forthcoming on how management intends to try to mitigate the cost burden, but whether this can fundamentally improve the situation given an asset-light business model remains to be seen.

Outsourced production and logistics means the company is exposed to struggling supply chains and rising costs. As expected, there was a significant hit on profitability in the half from higher glass bottle costs, glass availability, labour shortages, and sea freight costs. Gross margin fell by 670 basis points to 37 per cent and the adjusted cash profit margin was down by 700 basis points to 14 per cent.

The company said it is looking at several measures to address this. This includes improving local production capacity, with plans for US canning and Australian bottling facilities next year, and enhancing procurement. Such steps are positive and important ones to take. But the longer-term margin outlook remains challenging, and in the short-term the impact of inflationary pressures is expected to be worse in the second half.

When it came to the top line, there was nothing much new to report given the summer’s update provided a sales breakdown for the half. On-trade recovery boosted sales, with US and Europe trading ahead of pre-pandemic. The strongest growth came in Europe, where revenue was up 31 per cent to £52mn. UK revenue was up 6 per cent to £54mn, the US by 9 per cent to £40mn, and rest of world revenue by 5 per cent to £15mn.

We highlighted in a recent tip article the problems that Fevertree faces in the US market, despite revenue growth across the Atlantic. Analysts are unconvinced that the company can materially bump up its margins there – broker Peel Hunt thinks these currently sit in the low single-digit range. Premium mixer business Powell & Mahoney, acquired in August for $5.9mn (£5mn), could help but it is hard to see how the company gets out of the low-margin hole. 

Numis analysts said that “the cost outlook remains challenging but the company has also made good progress in terms of enhancing its supply chain capabilities”. The shares trade at 40 times the house broker’s 2023 financial year earnings forecast, a rating we think is just too expensive to justify. And poor cash generation and conversion, with only £1.5mn in cash generated from operations in the half, is another sticking point. Sell.

Last IC view: Sell, 905p, 01 Sep 2022