10-Q: Zevia PBC Reports Q3 2024 Results, Navigates Distribution Changes and Cost Initiatives

Zevia PBC's Q3 2024 results show a decrease in net sales and a focus on cost-cutting measures amid distribution changes and a competitive market.

Summary

• Zevia PBC reported a net sales decrease of 15.6% to $36.4 million in Q3 2024 compared to $43.1 million in Q3 2023.
• The company's equivalized cases sold decreased to 2.9 million in Q3 2024 from 3.3 million in Q3 2023.
• The decrease in sales was primarily due to lost distribution in the club channel and one mass channel customer, as well as increased promotional activities.
• Cost of goods sold decreased by 21.3% to $18.5 million in Q3 2024, driven by lower volumes and reduced inventory write-downs.
• Gross profit decreased by 8.8% to $17.9 million, but gross margin improved to 49.1% due to lower inventory write-downs and favorable unit costs.
• Operating expenses decreased significantly, with selling and marketing expenses down 41.4% due to lower logistics and warehousing costs.
• The company initiated a Productivity Initiative expected to yield $15 million in annualized benefits, with savings being reinvested in brand marketing and direct store delivery.
• Restructuring costs of $0.1 million were incurred in Q3 2024, primarily related to exiting two third-party warehouse facilities.
• The company regained compliance with the NYSE minimum stock price listing standard on October 1, 2024.
• Zevia had $32.7 million in cash and cash equivalents as of September 30, 2024.

Sentiment

Score: 4

Explanation: The document presents a mixed picture. While there are positive aspects like improved gross margin and cost-cutting initiatives, the significant decrease in net sales and lost distribution are concerning. The company is taking steps to address these issues, but the overall sentiment is cautious.

Positives

• Gross margin improved to 49.1% in Q3 2024, up from 45.4% in Q3 2023, indicating improved cost management.
• Selling and marketing expenses decreased significantly by 41.4% in Q3 2024, driven by lower logistics and warehousing costs.
• The Productivity Initiative is expected to yield $15 million in annualized benefits, which will be reinvested in brand marketing and direct store delivery.
• The company successfully regained compliance with the NYSE minimum stock price listing standard.
• The company has $32.7 million in cash and cash equivalents, providing a solid base for operations.

Negatives

• Net sales decreased by 15.6% in Q3 2024 compared to Q3 2023, indicating a decline in revenue.
• Equivalized cases sold decreased from 3.3 million to 2.9 million year-over-year in Q3, reflecting lower sales volume.
• The company experienced lost distribution in the club channel and one mass channel customer, impacting sales.
• Increased promotional activities were required to drive velocity and liquidate excess inventory, impacting profitability.
• The company incurred $0.1 million in restructuring costs in Q3 2024, indicating ongoing changes and potential disruptions.

Risks

• The company faces risks related to changes in the retail landscape and potential loss of key retail customers.
• Product safety and quality concerns, particularly regarding the plant-based sweetening system, could lead to lawsuits and recalls.
• Changes in consumer preferences and spending habits, especially due to inflation, could impact demand for Zevia's products.
• The company operates in an intensely competitive industry, which could affect its ability to maintain market share.
• Fluctuations in net sales and earnings may occur due to price concessions and promotional activities.
• The company relies on a limited number of third-party suppliers, which could lead to supply chain disruptions.
• The company is subject to extensive governmental regulation and enforcement, which could impact operations.
• The company's dependence on distributions from Zevia LLC to pay taxes and other expenses poses a financial risk.
• The company's status as a public benefit corporation could lead to additional liabilities.
• The company faces risks related to information technology systems, data privacy, and security breaches.
• The company's stock price volatility and potential delisting from the NYSE could impact investors.
• Future pandemics or disease outbreaks could negatively affect the company's business.

Future Outlook

The company expects to realize the full benefits of the Productivity Initiative over the next 3-5 quarters, with savings being reinvested in brand marketing and direct store delivery. The company also expects to see continued seasonality effects, with net sales tending to be greater in the second and third quarters of the year.

Management Comments

• The company is focused on building distribution in key accounts and evolving its route-to-market.
• The company expects it will take time to regain lost distribution in an increasingly competitive environment.
• The company is focused on driving growth and innovation in its highest margin carbonated better-for-you beverages.
• The company is re-aligning its cost structure to support greater investments in the Zevia Brand and improve operational excellence while simplifying processes across the organization.

Industry Context

The beverage industry is highly competitive, with increasing consumer demand for healthier, zero-sugar options. Zevia's performance is impacted by these trends, as well as broader macroeconomic factors such as inflation and supply chain challenges. The company's focus on cost-cutting and brand investment reflects a strategic response to these industry dynamics.

Comparison to Industry Standards

• Zevia's gross margin of 49.1% in Q3 2024 is relatively strong compared to some beverage companies, but it is important to compare this to companies with similar product portfolios and distribution models.
• The decrease in selling and marketing expenses by 41.4% is significant and suggests a focus on efficiency, but it is important to assess whether this reduction impacts brand awareness and sales growth.
• The company's Productivity Initiative is a common strategy in the industry to improve profitability, but the success of this initiative will depend on its execution and the competitive landscape.
• Compared to larger beverage companies, Zevia's revenue is relatively small, and its growth is more susceptible to distribution changes and promotional activities.
• Companies like Celsius Holdings, Inc. and National Beverage Corp. are also operating in the better-for-you beverage space, and their performance can be used as a benchmark for Zevia's results.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net sales and the potential impact on the company's stock price.
• Employees may be affected by the restructuring and cost-cutting measures.
• Customers may experience changes in product availability due to distribution changes.
• Suppliers may be impacted by changes in the company's supply chain and procurement processes.
• Creditors may be concerned about the company's financial performance and ability to meet its obligations.

Next Steps

• The company expects to substantially complete its Productivity Initiative by the end of the first quarter of 2025.
• The company will continue to focus on building distribution in key accounts and evolving its route-to-market.
• The company will continue to invest in brand marketing and direct store delivery.

Key Dates

Keywords

Zevia, beverages, zero sugar, plant-based, Q3 2024, financial results, net sales, gross margin, operating expenses, Productivity Initiative, distribution, NYSE, restructuring, supply chain