ROX New Barrington report out, highlights below:
? Q1/15 financial results: Yesterday, after the market’s close, Castle Brands reported the
results of its first quarter ended June. Net sales in the first quarter advanced 15.0% to
$12.0 million from $10.4 million last year, and above our estimate of $11.7 million,
attributed to strong results in the company’s Gosling’s and whiskey product segments.
Negative adjusted EBITDA ($53,000) improved from the prior-year period of ($159,000),
but fell slightly below our unguided estimate of ($24,000), in part due to higher-than expected
G&A expense, which was offset by improved gross margin.
? Gosling’s ginger beer leading the charge: In the first quarter, ginger beer sales
increased 70% to $2.2 million over the prior-year period on a 56% increase in volume.
Ginger beer growth provides a strong indication of the recognition and success of the
Gosling’s brand and signature Dark ‘n Stormy cocktail. Increased demand for the
complementary non-alcoholic beverage to Gosling’s rums, with more than 12 million
cans sold during the last twelve months, demonstrates strong national brand potential.
? Lower spirits volume a short-term concern: Despite spirits volume declining 1.4% to
87,110 cases, down from 88,340 cases in the prior-year period, sales from spirits
advanced 7.3% to $9.81 million, resulting from greater mix of higher priced premium
spirits. Revenue is lowest historically in the first quarter and builds through the holiday
season. Planned introductions of new whiskey and rum product extensions in the
second half of the year will boost spirits’ volume throughout the year, in our opinion.
? Revised FY/15 estimates: Our full-year estimates now call for 13% year-over-year net
sales growth to $54.4 million, above our previous estimate of $53.9 million, as ROX
introduces new product extensions and adds sales personnel to drive growth. We are
lowering our FY/15 adjusted EBITDA to $1.0 million, down $0.1 million, due to higher
expected selling and G&A expense, yet still provides a 70 bps EBITDA improvement.
? Reiterate OUTPERFORM investment rating: Castle Brands’ stock has advanced 37%
YTD, yet is trading below its 52-week high of $1.55 in March. Trading at 3.1x NTM
EV/Sales on current levels, Castle’s solid management team, premium spirit portfolio,
strong sales growth, and brown spirit industry tailwinds could provide further upside
price potential while moving toward profitability. Given the company’s smaller size and
relative lack of liquidity, we are applying a 4.2x NTM EV/Sales multiple (vs. the largercap
peer group median of 5.1x) and maintain our $1.50 price target
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