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Its slogan may be: “If ¾ of your drink is the mixer, mix with the best”, but for Fever-Tree Drinks (FEVR) that “mix” was only ever going to be off when its revenue is typically balanced almost 50/50 between pubs, bars and restaurants and at home drinking. And that is impossible when everything bar home drinking is shut down.
The impact of lockdown was clear to see back in September, when posting a 38% slump in first-half profits for the six months to the end of June, it was clear that on-trade sales, which typically represent around 45% of group revenue, had been severely impacted with lockdowns closing the entire leisure sector down in March, and having seen only limited re-openings before the end of the period under review.
Back then there was optimism though. With the festive season up ahead and with better-than-expected sales in its off-trade business, the company raised its interim dividend by 4% to 5.41 pence per share and said that barring any further significant lockdowns and instead a continued gradual recovery of the on-trade ahead, the company expected annual revenue to come in between £235 million and £243 million.
We all know what happened next. With the leisure sector now two months-plus into another national lockdown - and another month on top of that in parts of the country where hospitality was closed down before Christmas - the question is whether that pre-tax profit slump on the back of an 11% fall in revenue to £104.2 million year-on-year in the first half will turn out to be the only thing to cheer in a dismal year for Fever-Tree and the entire leisure sector?
This is quite new territory for the company, having been a darling of the stock market since it made its debut. Back in 2017 the so-called ‘posh tonics’ maker was on a roll. The rapidly-growing popularity of its premium tonic water saw sales growth of 97% that year and a further 53% in 2018, in the UK alone.
It has faced concerns before the pandemic struck though. There were fears it was losing its fizz back in 2019, when sales suddenly stalled amid mutterings that the UK had reached ‘peak gin’.
And let’s not forget that there are risks out there aside from those created by the pandemic. The mixers market is a competitive one and big companies with even bigger pockets are something Fever-Tree has always had to contend with. The risk of higher ingredient costs is another, as is rising costs overall, which has seen profit margins contract by around 20% already in the past three years.
Fever-Tree has long talked about its ambitions to make a significant impact on the US drinks industry, where it has long held ambitions to be more than just a British novelty.
While its US sales have been driven more by ginger ale than tonic, they were hovering around the 35% mark and looked set to account for potentially as much as 20% of group sales.
European sales are another thing to keep an eye on when Fever-Tree posts its full year results on Thursday.
In its pre-close trading update for the year to the end of December 2020, it said European revenue for the full year was up 1% to £65.3 million, a robust performance in the face of near-worldwide lockdowns from time to time.
On the US side it said that revenue had increased by 23% overall, due chiefly to at home sales growing “very strongly”. Brand recognition is clearly growing too and the production of Fever-Tree products now happening, as of December, at a bottling plant on the West Coast, will see not only reduced transport and logistic costs, but it will also make the company more agile when it comes to meeting demand as it finds its footing in the all-important US market.
So far, so good at a time when of course, the pandemic is not something anyone had anticipated and with strong liquidity and low levels of debt the company stands to bounce back when the pandemic is over.
Broker Liberum is still a fan. Analysts there have lifted the price target on the shares from £25.70 to £27.40, saying: “The strong off-trade share gains achieved over 2020 are reflective of the consumers’ desire to recreate premium long mixed drinks and cocktails at home, and should translate into more on-trade sales once lockdown ends.”
Fever-Tree’s full-year results are due out on Thursday.
More on Fever-Tree Drinks
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