Vita COCO Reports Promising Earnings: Is it a Buy?

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Written By Kevin MacDonald

COCO, known for its Vita Coco Coconut Water, reported promising earnings at the beginning of May. The company saw a 1.8% increase in top-line revenue, bringing in $111.7 million. Notably, Vita Coco Coconut Water sales grew by 0.6%, despite a tough comparison to the 17.5% growth seen in the same quarter last year.

Several factors hindered even better growth, such as a decline in direct store-delivery (DSD) inventory levels and the timing of shipments to key retailers. However, US private label sales declined by only 3.1% but showed positive volume growth of 3.8%, highlighting COCO’s strong positioning in a challenging consumer spending environment. Private labels are cheaper, and their resilience underscores COCO’s strategic strength.

Internationally, net sales surged by 20.1%, driven by robust performance in Europe, which offset weaker shipments in Asia due to reduced in-market inventory. The highlight here is that volumes grew by 8%, thanks to new accounts showing strong growth.

Profitability Surges

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One of the standout figures from the earnings report was the gross margin, which expanded by an impressive 1100 basis points to 42.2%, far exceeding consensus estimates of 35.4%. This strong performance led to adjusted EBITDA coming in well above expectations at $21 million, compared to the consensus estimate of $16 million. Additionally, EPS was $0.24, well ahead of the $0.18 expected by analysts.

Updated Guidance

Management has raised its FY24 net sales guidance to a range of $500 million to $510 million, implying growth of about 1% to 3%. This represents a 50 basis points increment at the midpoint relative to the prior guidance of flat to 2% growth. This guidance reflects management’s conservatism in light of the challenging consumer environment.

On the margin front, management also increased its gross margin guidance for FY24 to a range of 37% to 39%, up from the prior 36% to 38%. Consequently, adjusted EBITDA is now expected to be in the range of $76 million to $82 million, implying 16% growth at the midpoint, which is 400 basis points better than the prior guidance.

COCO is expected to easily meet or exceed this guidance if it continues its current pace of execution and growth. The pipeline of product innovation and international demand momentum support this view.

Product Innovation Driving Growth

COCO has some exciting products that should continue to fuel its growth. The company recently launched Vita Coco Treats, which are currently available only at Target. Initial responses have been positive, and more significant contributions are expected as distribution expands.

Another promising product is Vita Coco Farmers Organic, a premium product that is expected to experience growth due to its positive pricing contribution. In the alcohol segment, Vita Coco Spiked is set to benefit from its association with Captain Morgan’s brand, one of the top 10 rum brands in the US.

Strong International Prospects

With increased investment in Europe, COCO’s international momentum is expected to remain strong for the rest of the year. Management has announced plans to increase spending in the international segment, focusing on Germany and the Benelux countries.

Given COCO’s impressive growth in the UK, where it holds over 80% of the market, the company is well-positioned to succeed in these new markets.

International sales accounted for about 14% of total sales in 1Q24, and this segment is expected to play a larger role in driving growth in the future.

Margin Expansion Potential

COCO has significant potential to beat its margin guidance. With a 1Q24 gross margin already at 42.2%, the company would need to see a major deceleration in the next three quarters to miss the FY24 guide. Management’s conservative margin guidance likely reflects some recent increases in ocean freight rates.

However, freight rates have moderated recently, and COCO’s reduced reliance on forward shipping contracts allows it to be more agile in the spot market.

Valuation Metrics

Given the strong performance and promising outlook, the FY24 growth and adjusted EBITDA margin forecast have been upgraded to the high end of FY24 guidance: 3% revenue growth and 16.4% adjusted EBITDA margin.

For FY25 and FY26, COCO is expected to grow at least in the low teens, with continued margin expansion due to lower freight costs.

COCO continues to screen well against peers in the US beverage manufacturing industry. With a higher growth outlook and potential for continued margin expansion, COCO is expected to trade at the higher end of peers with a similar growth profile.

Using an 18x forward EBITDA multiple for FY26 estimated EBITDA of ~$114 million, the enterprise value comes to ~$2.045 billion. Adding the net cash of $123 million, the market cap is $2.17 billion, translating to a share price target of $38.

Risks to Consider

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The two main risks are execution and freight costs. Effective execution is crucial for product innovation, distribution expansion, and international success. Any missteps could impair growth.

Freight costs are another wild card that could negatively impact COCO if they spike unexpectedly, given the company’s increased exposure to spot rates.

COCO is well-positioned to meet or exceed FY24 guidance with its strong product innovation pipeline, international expansion plans, and potential for margin improvement from moderating freight costs.


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