National Beverage Corp

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 5/5

National Beverage Corp is an American beverage company with a focus on developing, producing, marketing, and distributing a portfolio of innovative flavored beverage brands.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

National Beverage Corp, primarily known for its LaCroix brand, operates in the competitive and fast-changing carbonated soft drinks industry, where brand differentiation and consumer loyalty are very important.

Business Overview

National Beverage Corp (FIZZ) is an American beverage company that develops, produces, markets and distributes a portfolio of flavored beverage brands, primarily carbonated soft drinks, sparkling water, energy drinks, juices, and juice drinks. Their main competitive advantage is brand awareness. The company uses a direct store delivery system and sells to wholesalers, retailers, and distributors mainly in the US. Its primary focus is on the innovation of new and unique brands to appeal to current and future customer demands, while maintaining quality and taste.

Revenue Distribution

The company’s revenue stream is primarily generated through the sale of their branded beverage portfolio. The most successful brands that National Beverage Corp owns is LaCroix, a sparkling water, and various flavors from its Power+ Brand series including Power+ Juice and Power+ energy. These products are sold in various pack sizes, forms (cans, bottles) and flavors to various kinds of customers ranging from retailers, wholesalers, and distribution businesses. The majority of the sales come from the United States and Canada. As for specific percentages by category, more detailed information is usually not provided by the company, except the consolidated data.

The beverage industry is constantly changing, with trends changing from the health and wellness movement to an increasing demand for variety and innovation. This includes, but is not limited to, a major shift towards low-sugar and low-calorie beverage options. Demand for sparkling water has been on the rise for the past few years. Consumer loyalty is paramount for the long-term success of brands in this sector, and also new brands are entering the industry all the time and disrupting the established ones.

Margins

National Beverage Corp maintains higher margins due to premium brand positioning and cost management, allowing them to earn higher profits from sales. They have gross margins in the low 40s and operating margins in the mid-20s, due to a large advertising and marketing budget, to support the creation of new and unique brands. In recent years, marketing spend has increased. There is also some volatility in those margins, though, which could be due to competition or fluctuations in costs.

Competitive Landscape

The beverage industry is highly competitive and the company faces competition from large corporations like Coca-Cola, PepsiCo, and others. Those companies have stronger marketing budgets and distribution networks. Smaller and new entrants also offer unique options, which makes the competitive landscape more cut-throat.

What Makes National Beverage Different

The main differentiators for National Beverage are: 1. A well-known and valuable brand (LaCroix); 2. Constant innovation; and 3. Distribution capabilities.

The company has shown great innovation in the last few years and has gained a great consumer base through brand loyalty. They have also been able to generate a premium price on their product because they are associated with wellness and quality.

Financials Analysis

National Beverage Corp’s financial health is very strong with almost zero debt and a huge cash balance. The company has generated significant returns, and also has some interesting facts related to sales and inventories. There was a sharp increase in inventories in the most recent quarters.

  • Revenues:
  • The company’s revenue growth has been decent in the most recent quarters. For the three months ending April 27, 2024, sales totaled $370 million, compared to $325 million for the same quarter last year. This translates to almost a 13% YoY growth.

  • Similarly, for the six months ending April 29, 2023, the company’s sales were almost $700 million, a significant jump from the $623 million recorded in the same period last year.

  • Margins:

  • Gross profit margins have improved slightly. For the three months ending April 27, 2024, they were 30.6%, slightly up compared to 28.9% in the same period last year, and 30.5% for six months ending April 29, 2023 compared to 27% for the same period last year.

  • Operating margins have also increased to around 20%, due to effective cost control and increased revenue.

  • Debt and Leverage:
    • The company has almost zero debt. This makes it able to handle financial instability quite well and gives them the option to leverage their debt to buy other companies.
    • Their leverage is really low, as a company is financed almost entirely by equity.
  • Cash Flow:
    • A look at the company’s cash flow statements reveals strong cash flow from operations, indicating that the company is good at generating cash from its business. The company is free to use this cash flow as it sees fit, to grow, improve operations, or return the capital to its shareholders.
  • Inventories
- There has been an increase in inventories in 2023 and 2024, which may indicate the company is preparing for higher sales volume, or that the inventory may be piling up. They have around 2.5 to 3x more inventory than they did in 2021, which is a little concerning.

Moat Rating: 3/5

National Beverage Corp has a narrow, but not insignificant moat based on its brand strength (LaCroix, Power+), its pricing power in the niche segment of premium flavored waters, and an established distribution network in the USA and Canada.

  • Brand Recognition: LaCroix has strong consumer recognition and brand equity.
  • Switching Costs: The low cost for consumers makes it easy to switch to other brands, and because there are no contracts with customers, they can easily go to competing brands. Switching costs are almost non-existent.
  • Network Effect: Network effects are not applicable in this market as it is purely a product based business.
  • Cost Advantages: As a beverage manufacturing company, they don’t have cost advantages in any way.
  • Intangible Assets: Brands (LaCroix, Power+ brands) are a significant source of their revenue and give them some pricing power over other unbranded drinks. While the company doesn’t have a big moat, it is still significant enough to make them above the average competitor.

Legitimate Risks to the Moat and Business Resilience

  1. Increased Competition: The market is seeing the entrance of new competitors and private label brands that are gaining a lot of market share.
  2. Changes in Consumer Preferences: Trends in beverages can be unpredictable, and the market for sparkling water can decline, making them unable to generate revenues.
  3. Supply Chain Issues: As evident with the increase in their inventories, supply chain issues and raw material pricing can lead to increased costs. The company also has to rely on the distribution network to sell their product.
  4. Changing Accounting Standards: The changing accounting standards have some implications on the way companies report their earnings, assets, and tax liabilities, which can be a risk if the company is not able to accurately predict them.
  5. Acquisition Challenges: The company has been known to have acquired smaller companies. If they buy too many companies, or are not able to integrate the target company well, the value creation may not be successful.

Understandability Rating: 3/5

The business model for National Beverage Corp is clear, straightforward, and easily comprehensible. They manufacture branded beverages, with a focus on innovative products, mainly sparkling water, and distribute to the masses. The complexity lies in valuing the brand value, understanding the volatile consumer tastes, and analyzing the implications of supply chain costs and how they might affect future financials. Overall, the business is easy to grasp, but hard to value.

Balance Sheet Health Rating: 5/5

National Beverage Corp has an extremely healthy balance sheet. They hold large amounts of cash and have a low debt-to-equity ratio, providing a lot of financial flexibility. Also, they have a large positive net worth. The company’s financials are not likely to cause any major problems for the company. This also means they can easily weather financial or economic downturns.

Recent Concerns/Controversies

  1. Inventories: There has been a large build-up in their inventories in recent quarters. The management has stated that this was due to an increase in raw material prices, and that they intend to sell these products at the new prices. The actual impact of this remains to be seen.
  2. Share Buybacks: The company has aggressively purchased shares in 2021 and 2022, at very high prices. The share buybacks are not a guaranteed success, and the company might not be able to make a profit from selling these shares. However, those shares do increase their earnings per share.
  3. Lawsuits: In past years, the company was involved in multiple lawsuits. While a lot of those lawsuits have been resolved, new lawsuits can occur in the future. Also, the outcomes of any lawsuits are always uncertain.

These points should also be considered when doing your own due diligence.