Reed's, Inc. (OTCQX: REED), the owner of the nation's leading portfolio of handcrafted, natural ginger beverages, has demonstrated resilience and strategic focus in navigating the challenges of the past year. With a commitment to operational excellence and a pipeline of innovative products, the company is poised to capitalize on the growing consumer demand for better-for-you, premium beverages.
Business Overview
Reed's, Inc. is a leading player in the craft beverage industry, known for its high-quality, naturally bold ginger-based products. The company's portfolio includes the iconic Reed's Ginger Beer, Virgil's Craft Sodas, and the non-alcoholic butterscotch beer, Flying Cauldron. Leveraging its expertise in crafting premium, natural beverages, Reed's has successfully expanded into the zero-sugar segment, catering to the evolving preferences of health-conscious consumers.Financial Performance
In the fiscal year 2023, Reed's reported annual revenue of $44,711,000, a testament to the strength of its brand and product offerings. However, the company faced challenges, resulting in a net loss of $15,523,000 and negative operating cash flow of $4,266,000. The company's free cash flow for the year was also negative at $4,354,000.The first quarter of 2024 saw a continuation of these trends, with net sales declining 14% year-over-year to $9,595,000. The decrease was primarily driven by supply chain constraints, which led to an elevated rate of short order shipments. Despite the top-line challenges, the company made significant progress in improving its operational efficiency and profitability.
Operational Optimization
Reed's has implemented a series of cost-cutting and optimization initiatives that have yielded tangible results. In the first quarter of 2024, the company reported a 26% increase in gross profit to $3,413,000, with gross margin expanding by 1,140 basis points to 35.6%. This improvement was driven by lower supply chain and input costs, as well as a favorable shift in the product mix towards cans.The company's focus on streamlining its operations has also led to a 29% reduction in delivery and handling expenses, which declined to $1,502,000 or $3.01 per case, compared to $2,120,000 or $3.46 per case in the prior-year period. These savings were achieved through renegotiated freight rates, improved throughput, and efficiencies gained from the company's new co-packing partnership.
Furthermore, Reed's has made strides in reducing its selling, general, and administrative (SG&A) costs, which decreased by 19% to $2,561,000 in the first quarter of 2024. As a percentage of net sales, SG&A costs were reduced to 27%, compared to 28% in the same period last year.
These operational improvements have translated into a significant reduction in the company's operating loss, which improved to $650,000 in the first quarter of 2024, compared to a loss of $2,578,000 in the prior-year period. Additionally, the company's modified EBITDA loss improved to $370,000, compared to a loss of $2,265,000 in the first quarter of 2023.
Product Innovation and Channel Expansion
Recognizing the evolving consumer preferences, Reed's has been actively investing in product innovation and channel expansion. The company recently launched its Virgil's Craft Soda cans in Sprouts Farmers Market, expanding its presence in the natural and organic retail channel. Additionally, the company has secured a second national authorization for its alcohol assortment at Whole Foods, building on the success of its previous national off-shelf program.Reed's has also identified the on-premise channel as a significant growth opportunity and has plans to expand its presence in this segment with the launch of its 7.5-ounce ginger ale mini cans later this year. The company's e-commerce business has also shown promising results, with month-over-month growth since the beginning of 2024, and the recent launch of its Virgil's cans on Shopify and Amazon.
Liquidity and Debt Management
As of March 31, 2024, Reed's had approximately $314,000 in cash and $26,000,000 in total debt, net of capitalized financing fees. This included $18,192,000 from convertible notes and $7,844,000 from the company's revolving line of credit, which had an additional $4,995,000 of borrowing capacity.The company's management has been actively working to address its liquidity and debt management challenges. In the first quarter of 2024, Reed's used $2,395,000 in cash from operations, primarily driven by higher inventory purchases to improve its short order shipment rate. The company has also received $4,100,000 in additional cash from investments with significant stockholders, which will be used to support its ongoing operations and growth initiatives.
Outlook and Growth Strategies
Looking ahead, Reed's is reiterating its 2024 financial outlook, expecting to deliver net sales growth, gross margin expansion, and modified EBITDA profitability, while generating positive cash flow from operations for the full year. The company's growth strategies include improving order fulfillment rates, expanding product authorizations, increasing promotional activity, and launching new innovative products targeting the better-for-you category.Reed's has also identified specific customer and geographic targets for its initial rollout into the on-premise channel, which the company believes will increase trial and brand awareness of its products. Additionally, the company is focused on leveraging its e-commerce platform to drive incremental sales and brand engagement.
Risks and Challenges
While Reed's has made significant progress in optimizing its operations, the company continues to face challenges related to supply chain disruptions and inflationary pressures. The company's ability to manage these headwinds and maintain its operational efficiency will be crucial to its long-term success.Furthermore, Reed's significant debt burden and the need to service its convertible notes and revolving line of credit pose ongoing risks to the company's financial stability. The company's management has been actively working with its lenders to negotiate favorable terms and explore refinancing options, but the outcome of these efforts remains uncertain.