Fever-Tree shares slump on profit warning

Shares in Fevertree Drinks PLC fell 27% last week after the company warned on profits for the full-year. At its half-year trading update, the mixer producer said it was cutting full-year profit forecasts due to labour shortages in the US and rising input costs.

Management says it now expects earnings before tax, depreciation and amortisation of £37.5 million and £45 million for the full-year. However, it is maintaining its previous revenue guidance of £355 million and £365 million.

Fever-Tree: logistical headwinds and glass shortages

The brand saw a strong performance in Europe, with revenues up 31% at constant currency rates and growing demand in the US.

However, staff shortages in the US East Coast have meant that products being shipped from the UK and sea freight costs have risen by 50% on some routes. These costs are eating into the company’s margins, while there is also a shortage of glass.

"Whilst we are seeing positive top line performance and expect to deliver good revenue growth for the full year, the challenging logistical and cost headwinds we highlighted previously have significantly worsened in recent months and we now expect them to notably impact our full year margins,” Fever-Tree’s chief executive Tim Warrillow told investors.

“The business is working on a large number of initiatives, and more closely than ever with suppliers throughout our supply chain, to mitigate the transitory headwinds and at the same time ensure we can satisfy the strong demand we are seeing in our growth regions.”

The shares rebounded by 6% on Monday to 921p.

Short-term pain for Fever-Tree

However, Warrillow said management had “more confidence than ever” in the brand’s long-term opportunity, given continuing strong demand and interest in long mixed drinks. Management also highlighted that the impact of the labour issue would be short-term.

Nevertheless, City analysts were unimpressed. Analysts at Deutsche Bank cut their price target on the shares to 900p from 3,060p, citing concerns about pressure on consumer spending. "We continue to see attractions in Fever-Tree’s long-term revenue growth opportunity,” analysts there said, “but the company’s track record of margin contraction leaves us unable to have conviction in upside from current levels.”

Meanwhile, analysts at broker RBC said they were “surprised” by the profit warning, given that the issues of logistics costs and glass shortages had been well known for some time.

They also said that the cut in earnings guidance “poses big questions over both the brand’s pricing power and long-term profit potential, in our view.”

The shares are down 63% in the past year and have lost all their lockdown gains, now trading at a five-year low after hitting a high of 2719 in December 2021. With consumer demand remaining strong, they could be a long-term buy. However, with rising inflation and input costs, things could get worse before they get better.

Fever-Tree posts half-year results on 13th September.

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*Based on revenue excluding FX (published financial statements, June 2020).