Description

Anyone else sitting at their desk, crushing LaCroixs, and desperately searching for their next big idea? National Beverage Corp (FIZZ) has growth, value, a turnaround and even significant short squeeze potential. All in one idea.

FIZZ Bull Thesis

• Market Misperception on 2018/2019 Weakness: The market perceives LaCroix as a vulnerable brand that will continue to lose share due to increased competition. From 2H18 to 2H19 LaCroix share declined by ~400bps as a result of a frivolous lawsuit and competition from Pepsi’s Bubly. Industry sources told me this view is misguided and FIZZ’s problems were self-inflicted. FIZZ got cocky with the sales channel at the exact wrong time.

• Positive Scanner Data: FIZZ has corrected its strategic blunders of 2018 and 2020 scanner data now shows a turnaround. FIZZ has shown accelerating growth every month in 2020, even in the face of increased competition. Nielson data shows LaCroix growing 26% in the past month and LaCroix has regained share for the first time since 2018.

• Category Leader with Structural Tailwinds: LaCroix is the leading brand in a category with strong structural tailwinds. Sparkling water has grown at a 15-20% CAGR for the past five years and this is likely to continue for the next decade or longer as consumers shift from soda to sparkling water.

• Numbers Too Low: Analysts are calling for benign sales and earnings growth despite recent earnings beats and strong scanner data. I estimate NTM earnings of $4/share vs. consensus of $2.85.

• Attractive Valuation: Net of $6.50/share of cash, FIZZ is trading at 15x my NTM EPS estimate of $4. This is cheap on an absolute, historical, and relative basis.

• Sentiment is Very Negative: Both sell side analysts have sell ratings as a result of increased competition. Short interest is 6mm shares; ~50% of the float and 30+ days to cover.

• Substantial Upside:  I believe FIZZ will take out its previous highs ($125) within the next 12 months as the turnaround, earnings power, and brand strength are appreciated by the market. Longer term, FIZZ should grow EPS at a 20-30+% CAGR (15+% organic sales growth plus margin expansion) which should result in $8-10 of earnings within 3 years. At a 25x multiple FIZZ would be a $200-$250 stock.

2018 Strategic Blunder

Sparkling water has exploded in popularity the past five years and LaCroix has been a key driver of the category’s success. From 2014 to 2018, LaCroix grew its market share from 8% to 22% as its flavored sparkling water with no artificial sweeteners appealed to consumers looking for a healthy alternative to carbonated soft drinks (CSDs). The brand resonates with millennials and sales went viral.

FIZZ went from hero to zero in 2018/2019. Sales went from growing ~20%, driven by 30-40% LaCroix growth, to declining 10% in 2Q19 as LaCroix sales dropped 15-20%. FIZZ collapsed  from $125 to $40 and the multiple was cut in half. It is easy to attribute the sales decline to 1) a media magnet lawsuit in October 2018 which claimed there was cockroach insecticide in LaCroix and, 2) increased competition in the category, primarily from Pepsi’s Bubly. Both of these drivers suggested LaCroix was a weak brand with fickle customers.

Conversations with the channel, ex-employees and buyers, suggest this market perception is wrong and LaCroix’s problems were actually self-inflicted. The company became arrogant due to its success as the category leader at the exact wrong time. They played hardball with their partners on trade spend/advertising/new flavors/etc which resulted in retailers pulling back shelf space and allocating it to new deep pocketed competitors eager to buy share. This was exacerbated by a social media firestorm from a lawsuit which emboldened partners to pullback from LaCroix. 

The channel arrogance was a top-level decision and was very controversial within the FIZZ ranks. A majority of the salesforce left the company out of frustration with this strategy. 

Turnaround at Play – Scanner Data Inflecting

The good news is LaCroix is incredibly resilient and FIZZ has fixed their mistakes. In the past year the Company has re-engaged with its partners and is investing in promotional spend and the brand is growing again. This isn’t just Covid pantry stuffing: La Croix is actually taking back share in the category for the first time in two years despite increased competition from regional players, relentless spending by Pepsi’s Bubly, and the entrance of Coke’s Aha. 

Neilson data shows LaCroix has accelerating growth every month in 2020. Trailing 4 week sales for LaCroix are up 26% and the company has regained 157 bps of unit share. Of note, LaCroix represents ~70% of total FIZZ sales and has been growing each year.

LaCroix is the Category Leader

LaCroix has the top brand in the top growing beverage category with strong structural tailwinds. Despite the 2H18 and 2019 weakness, the LaCroix brand has proven resilient and is poised to retake share going forward.

The national category manager for sparkling water at Kroger, the largest grocer in the country and a company that relies heavily on data and analytics, told me LaCroix is the #1 sparkling water brand and that for Kroger’s sparkling water category to be successful, they need LaCroix. More importantly, Kroger data shows LaCroix shoppers are the most loyal. Other sparkling water drinkers hop between different brands and flavors, but LaCroix drinkers generally stay with LaCroix, or go back to LaCroix. That has been my personal experience - Bubly flavors taste weird, Waterloo too bold, Topo Chico (my wife’s favorite) too bubbly. She can only drink one Topo Chico while multiple LaCroix’s go down easily. Everyone has their own personal experiences, but Kroger has the nationwide data to support the strength of the LaCroix brand. 

Sparkling water is currently one of the most competitive categories in the grocery store, but it is going to be hard for a new entrant to knock off LaCroix and the category will shake out the weak players. We have seen this play out in many categories, but most recently in the spiked seltzer category where White Claw and Truly have maintained their leadership positions.

As for competition, Bubly has been successful in gaining share because Pepsi has invested relentlessly in promotion. Coke’s Aha is the most recent competitive threat. According to Kroger, Aha is much more likely to take share from Bubly then it is from LaCroix due to can design and weird flavors. Aha has been on the market for a while and yet LaCroix has regained share and seen accelerating growth in 2020. Three weeks ago Keurig Dr Pepper signed a national distribution deal with Polar sparkling water,the leading sparkling water brand in the Northeast and the new knocked FIZZ from $70 to $60. Kroger has already run trials of Polar outside the core Northeast markets and has been disappointed with seven out of the nine regions where it has been sold. The two regions where it has been successful are where Polar is making heavy promotional investment.

Sentiment is Negative

FIZZ’s two sell-side analysts, Jefferies and Guggenheim, both have sell ratings. Morningstar rates them as a hold. The sell-side is concerned about future share losses from new competition (primarily Aha) similar to 2H18/2019 as a result of Bubly. This creates today’s opportunity. One of the analysts only other sell ratings is SAM, based on Truly competition. SAM is up 140% YTD and its NTM multiple has expanded from 32x to 55x as Truly has shaken off new entrants and kept growing.

FIZZ also has a dangerously large short interest. 5.9mm shares are short. That’s 50% of the float and over 30 days to cover. Bears could be in a world of hurt if sales and EPS growth accelerate like they have been and the market starts putting a fair multiple on this growth stock. What would happen if the market put a MNST (34x), SAM (55x), or even just a KO (24x) multiple on FIZZ?

Numbers Too Low, Valuation Attractive

Consensus estimates call for 2% sales growth in FY21 (which is the next 4 quarters and ends April 2021) despite 9.5% sales growth last quarter and accelerating scanner data. This seems too low and I think FIZZ top line grows 13-15+% in FY21. It is also important to note FIZZ’s reported growth has consistently outgrown the scanner data as a result of strong growth in non-tracked channels like the club channel. My local Costco was sold out of LaCroix last time I visited. 

As volumes and sales grow, FIZZ should be able to reverse lost margin. EBIT margins fell from 20.9% in FY18 to 16.6% in FY20. This past quarter, FIZZ was able to regain 235bps of gross margin and 358 bps of EBIT margin when sales grew 9.5%. Using 15% sales growth and 390 bps of EBIT margin expansion (to land at 50 bps below 2018 levels), FIZZ should do ~$4 of EPS this year.

With $6.50 of cash, FIZZ is trading at 15x my NTM EPS estimate (or 20x consensus). This is cheap for a leading brand with strong structural tailwinds. Longer term, EPS should be able to compound at 20-30+% for the foreseeable future and we could see $8-10 of earnings in 3 years from 15% organic sales growth plus margin expansion. 

As for a sell-out/acquisition, that is unlikely in the near term given this company is everything to its eccentric CEO, Nick Caporella. But Nick is 83 years old and at some point might want to sell. He explored that option a decade ago. Regardless, time catches everyone and ultimately this brand holds substantially higher value (via higher margins, better execution, etc) if it was plugged into a KDP, PEP, or KO system.

Risks

The biggest risk is management and execution. FIZZ’s lighting rod CEO has done the brand no favors with the way he has handled the channel partner relationships or the cockroach poison lawsuit. He made matters worse when he compared the LaCroix brand to managing someone who became handicapped in 2019. Thankfully the Company doesn’t hold conference calls. It appears that the Company has reigned in some of his “enthusiasm” in the past year and recent press releases appear more normal, at least by FIZZ standards. My fingers are crossed.  

Summary of FIZZ Bull Thesis

LaCroix is the leading brand in a category with strong structural tailwinds. FIZZ’s sales declines in 2H18/2019 were largely self-inflicted and the Company has fixed their mistakes. LaCroix is back to growing 20+% and is retaking market share. FIZZ has $6.50 of cash and should do ~$4 of NTM EPS vs. consensus of $2.85. Analysts are too negative based on competitive threats and over 50% of the float is short. As FIZZ continues to hold or regain share in the face of strong competition (Coke and Pepsi) and defend their #1 position in a category growing over 15+% per year, FIZZ’s multiple should re-rate significantly and FIZZ will take out its previous highs. 

Catalyst

Earnings

Scanner Data

Upgrades