Food and Beverage Sector Ideas

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>>> Reed's 2.0: Still A Work In Progress



Sep.19.17

Galileo Russell


https://seekingalpha.com/article/4108025-reeds-2_0-still-work-progress



Summary


•Reed's continues to progress on its turnaround and has implemented a number of key strategic changes so far this year.

•In April 2017, founder Chris Reed stepped down from the CEO role into that of Chief Innovation Officer.

•In July, Val Stalowir was named the new CEO.

•In September new chairman John Bello purchased $150,000 worth of stock in the open market at $1.70 per share.

•2017 financials have been disappointing thus far, but a major rebranding in 2018 could be the catalyst Reed's needs.


Intro - New Management Offers Hope


I originally wrote about Reed's (REED) turnaround in March of this year. Since then, the company has announced a number of strategic changes to get itself back on track.

In April, Reed's CEO and Founder Chris Reed stepped down from the position he's held for 30+ years, to the more product-focused role of Chief Innovation Officer.

This move has been a long-time coming.

For years investors in Reed's have been faced with a dilemma surrounding the Chris Reed.

On one hand, he is a beverage industry visionary, and the mastermind behind Reed's industry-leading natural sodas. On the other hand, he has never been able to operate the company profitable, and has a habit of over-promising and under-delivering.

Ideally, having Chris Reed focused on product innovation full-time is a win on two fronts. In addition to being more concentrated on brewing and directly improving Reed's products, he can hand over the operational reigns to someone with more experience.

John Bello, was appointed as Reed's new chairman of the board in December 2016, and has been tasked with leading the turnaround. Bello was the Founder and CEO of Sobe, a brand that he sold to Pepsi (NYSE:PEP) for $370M in 2001.

In July, Bello anounced that Reed's had completed its search for a new CEO, and gave Val Stalowir the job. Stalowir is a 25-year beverage industry veteran, with experience at a wide variety of both established firms (Quaker Oats, Coca-Cola) and startup brands (Boylan Bottling, Zola Acai).

Both these leaders have impressive pedigrees, and are exactly the type of personnel Reed's needs to reinvent its business model. Now its time for these experienced executives to start putting up numbers.

ll We Ever Return To Growth?

Reed's had been able to grow revenue consistently every year since 2009, but faced supply chain challenges in late 2015 that threw the business off course.

What was once a serial revenue compounder, is now begining to look like a business in decline.

Click to enlarge It's no secret that the soda industry as a whole has been struggling, as consumers continue to educate themselves about the negative health effects of consuming too much sugar.

In response to these shifting market conditions, Reed's is in the process of a complete makeover of both its core Reed's and Virgil's brands. This strategy includes both rebranding, and reformulated products with as little as 5 calories per 12 oz serving.

If its recent financials are any indication, Reed's is in dire need of this brand makeover. Revenue in the first half of this year was down 18%, and operating margins continue to suffer.

Although management did tout improving gross margins, and a return to sales growth in July on its most recent earnings call, it won't be anywhere near enough to get Reed's to profitability on a GAAP basis.

The company needs its new low-sugar line of sodas to be succesful if it wants a chance to succeed. As of now, management has guided for new Virgil's products to come to market in Q1 2018, with updated Reed's SKUs arriving shortly thereafter.

Valuation

At $2.25 per share, Reed's has a market capitalization of $34M (assuming 15M shares outstanding).


As of Q2 2017 the company had only $251K in cash, and $12M+ in debt. There's no doubt Reed's is in a fragile fiscal situation, and needs to strengthen its balance sheet.

In a recently filed an S-1 offering, Reed's anounced its intentions to sell another 800K shares. Although this could raise nearly $2M for the company, it likely won't be enough to carry the company to profitability.

Given my estimate of $38M in 2017 revenue, Reed's is only trading at 0.9X price/sales. This depressed multiple reflects the fact that Reed's business appears to be a perpetual money loser.

Succesful beverage businesses trade at significantly higher price/sales multiples, despite radically lower growth potential. For example, Coca-Cola (KO) trades at 5X price/sales, Pepsi trades at 2.6X price/sales, and Dr.Pepper (DPS) trades at 2.5X price/sales.

If Reed's is able to turn its business around, investors could see upside from both multiple expansion as well as sales growth. This is what makes the company so exciting.

However, there are still a lot of unanswered questions about the state of the company. Losses are at an all-time high, while revenue continues to shrink. Without a succesful return to growth, Reed's will be doomed to trade at a depressed multiple and dilute shareholders in perpetuity.

Where's The Fountain?

Reed's initially anounced the availability of its all-natural soda fountain offering in March 2016.

This is by far the most important product in Reed's pipe-line. Fountain revenues are drastically higher margin than glass-bottle sales, and the soda fountain market is ripe for disruption.

Coke and Pepsi have a near duopoly, and the new wave of healthy food startups are desperate for natural beverage alternatives.

Ever since the new management team has come onboard, Reed's has been very quiet about its fountain product. Investors should be eagerly awaiting any updates on this initiative, as it could significantly enhance profitability if it ever comes to fruition.

Conclusion - Still A Work In Progress

There's no denying the potential of Reed's. The company was a first-mover in the natural/craft-soda space and has the opportunity to capitalize on a broad-scale shift in consumer beverage preferences towards healthier products.

Putting in place an experienced management team was a necessary step in the company's turnaround.

In a best-case scenario, this new team can work together with Chris Reed to bring the next generation of Reed's products to market. This has the potential to return the company to profitability and significantly expand Reed's rock-bottom price/sales multiple.

In a worst-case scenario, Reed's products will continue to struggle amidst declining soda sales, and the company will be forced to sell itself or simply go out of business.

The jury is still undecided on this craft soda micro-cap.

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