Fever-Tree: tonic maker struggles with transatlantic trade

The build-up to England’s “freedom day” grand reopening has been good for drinks makers. Shares rallied in anticipation of a boost from sales in pubs and bars. Tonic maker Fever-Tree on Tuesday presented the fruits of reopenings that have already taken place elsewhere.

Like-for-like sales in the six months to June rose by a third to £137m, a fifth higher than the market expected. Growth, though, came at the cost of soaring transport costs. The hit to margins sent shares 6 per cent lower on Tuesday.

Fever-Tree became a British sensation as a mixer of choice during the revival of the nation’s taste for gin. Drinkers were not the only ones caught up in the buzz. Shares returned more than 2,000 per cent for those who bought at the 2014 IPO and sold at the peak four years on. Slowing UK sales took some of the fizz out of the share price before the pandemic arrived. But given the pressure on profitability, frothiness remains.

Lex graphic on Fever-Tree performance

Gross margins in the first half fell two percentage points to 44 per cent. Sea freight rates to the US, which have almost trebled since the start of the year, are largely responsible. The gross margins of 43 per cent expected for the full year are smaller than at any time in the past decade. Expected ebitda margins of 20 per cent this year are the lowest since 2013.

The UK market is considered mature and expected to grow at low single digits. Yet there is scope for expansion abroad, with the US providing plenty of growth opportunities. Until local supply can satisfy demand, profits will still be subject to the whims of transatlantic shipping. But production on the west coast is under way, while east coast production is expected to begin later this year.

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Fever-Tree sales might well hit £300m this year, the top end of expectations. A 15 per cent net income margin puts shares on a price-to-earnings ratio of almost 60 times. That is almost a third more than their historical average. This beverage needs further time to settle before investors partake again.

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