10-Q: Zevia PBC Reports First Quarter 2024 Results, Net Sales Decline Amid Supply Chain Adjustments

Zevia PBC's first quarter 2024 results show a decrease in net sales and a loss from operations, impacted by supply chain changes and distribution challenges.

Summary

• Zevia PBC reported a net sales of $38.8 million for the first quarter of 2024, a decrease from $43.3 million in the same period last year.
• The company experienced a loss from operations of $7.3 million, compared to a loss of $3.3 million in the first quarter of 2023.
• The decrease in net sales was primarily due to a reduction in equivalized cases sold, which fell from 3.3 million to 3.0 million.
• The company's gross profit decreased to $17.7 million from $20.1 million year-over-year, with a gross margin of 45.7% compared to 46.4%.
• Operating expenses increased to $25 million, up from $23.4 million, driven by higher selling and marketing costs.
• Zevia is implementing a Productivity Initiative expected to yield $8 to $12 million in annualized benefits, starting in the third quarter of 2024.
• The company incurred a net loss attributable to Zevia PBC of $5.8 million, or $0.10 per share, compared to a net loss of $2.1 million, or $0.03 per share, in the prior year.
• As of March 31, 2024, Zevia had $28.7 million in cash and cash equivalents.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with a significant decrease in sales and increased losses, but also includes a plan for improvement with the Productivity Initiative. The sentiment is cautiously negative due to the current financial performance.

Positives

• Zevia is implementing a Productivity Initiative expected to yield $8 to $12 million in annualized benefits, starting in the third quarter of 2024.
• The company onboarded a new global transportation management company to optimize freight management.
• Zevia is focused on winning back distribution in key accounts and evolving its route-to-market.
• The company is increasing investments in consumer marketing outside of the store.
• Zevia is exploring a regional approach to direct store delivery (DSD) and gaining distribution in regional convenience chains.

Negatives

• Net sales decreased by 10.4% year-over-year, from $43.3 million to $38.8 million.
• The company's loss from operations widened to $7.3 million, compared to $3.3 million in the same quarter of the previous year.
• Gross profit decreased by 11.9% to $17.7 million, with a slight decrease in gross margin from 46.4% to 45.7%.
• Selling and marketing expenses increased by 26.5% to $15.1 million, driven by higher freight and warehousing costs.
• The company experienced delays in recovering SKU level distribution at certain retailers due to prior supply chain issues.
• The company experienced slightly higher operating costs, including logistics, manufacturing and labor costs.

Risks

• The company faces risks related to supply chain disruptions, including reliance on a limited number of third-party suppliers.
• Fluctuations in raw material costs, particularly aluminum and stevia, could impact profitability.
• Changes in consumer preferences and spending habits, especially due to inflation, could affect demand for Zevia products.
• The company operates in a highly competitive industry, which could impact its ability to maintain market share.
• The company's history of losses and potential inability to achieve or maintain profitability pose a risk.
• Adverse global macroeconomic conditions, including high interest rates and recession fears, could impact the business.
• The company is dependent on distributions from Zevia LLC to pay its taxes and other expenses.
• The company is subject to extensive governmental regulation and enforcement.

Future Outlook

The company expects to see benefits from its Productivity Initiative starting in the third quarter of 2024, and is focused on recovering distribution and evolving its route-to-market. They also expect to continue to invest in consumer marketing throughout 2024.

Management Comments

• The company believes that changes to its supply chain will allow it to leverage the purchasing power of its contract manufacturers and further diversify.
• Management expects that the Productivity Initiative will realign the cost structure to support greater investments in the Zevia Brand and improve operational excellence.
• The company is focused on winning back distribution in key accounts and concurrently evolving its route-to-market.
• Management expects to obtain certain insights from regional direct store delivery routes to position the company for potential additional opportunities for future growth and expansion.

Industry Context

The beverage industry is highly competitive, with companies constantly innovating and adjusting to consumer preferences. Zevia's focus on zero-sugar, plant-based beverages aligns with current health trends, but the company faces challenges in maintaining distribution and managing costs in a dynamic market. The company is also facing increased competition from other brands in the zero sugar space.

Comparison to Industry Standards

• Zevia's gross margin of 45.7% is within the range of other beverage companies, but the decrease from 46.4% indicates potential challenges in cost management.
• The increase in selling and marketing expenses to 39% of net sales is higher than some competitors, suggesting a need for more efficient marketing strategies.
• The company's net loss of $5.8 million is worse than some of its peers, indicating a need for improved profitability.
• The company's focus on a regional approach to direct store delivery is similar to strategies employed by other beverage companies to improve distribution and market penetration.
• The company's reliance on third-party contract manufacturers is a common practice in the beverage industry, but it also introduces supply chain risks.

Management Changes

Stakeholder Impact

• Shareholders will be concerned about the decrease in net sales and increased losses.
• Employees may be affected by the restructuring actions and workforce reduction.
• Customers may experience changes in product availability due to distribution challenges.
• Suppliers may be impacted by changes in the company's supply chain strategy.
• Creditors may be concerned about the company's financial performance and ability to meet its obligations.

Next Steps

• The company will continue to execute its Productivity Initiative to reduce costs and improve efficiency.
• Zevia will focus on recovering distribution in key accounts and evolving its route-to-market.
• The company will continue to invest in consumer marketing outside of the store.
• Zevia will explore a regional approach to direct store delivery (DSD) and gain distribution in regional convenience chains.

Key Dates

Keywords

beverages, zero sugar, plant-based, supply chain, distribution, net sales, gross profit, operating expenses, marketing, productivity initiative, financial results, Zevia