GURU Organic has target cut by Echelon

Industry-wide logistics headwinds are blowing against Quebec-based beverage company GURU Organic Energy Corp (GURU Organic Energy Stock Quote, Charts, News, Analysts, Financials TSX:GURU). That’s the scoop from Echelon Capital Markets analyst Amr Ezzat, who reviewed the latest quarterly numbers from GURU in an update to clients on Wednesday, calling the results mixed.

“GURU Organic Energy reported mixed fiscal Q3 2022 results [on Wednesday] which saw revenues come 18.9 per cent below consensus but in line with our Street-low forecast. Revenues were impacted by industry wide logistics constraints,” said Ezzat in his report. 

“EBITDA was ahead on better gross margin percentage and lower SG&A spend than anticipated. We are lowering our target price to $9.00/share from $14.00/share on a tempering of our short- and medium-term forecasts, as well as a recalibration of our valuation parameters,” he wrote.

Founded in 1999 and headquartered in Montreal, GURU markets its organic energy drinks in Canada and the US through a distribution network of over 21,000 points of sale, as well as online. The company’s third quarter fiscal 2022 for the period ended July 31 featured revenue of $7.7 million compared to $8.0 million a year earlier, while the nine-month revenue mark was $22.3 million compared to $21.7 million for the previous year period. The company’s net loss for the quarter was $6.5 million compared to a loss of $2.0 million a year earlier and its adjusted EBITDA was a loss of $6.5 million compared to a loss of $1.8 million a year earlier.

“While we are encouraged by our growth in consumer purchases and market share, more work is required on execution and marketing,” said President and CEO Carl Goyette in a Wednesday press release. “We will continue to invest strategically and prudently to increase brand awareness and conversion. We will also continue to improve in-stock positions and execution to mitigate industry-wide labour and logistics disruptions, which were felt more over the course of the summer than in previous quarters.”

GURU said it recently deployed its largest Canadian marketing campaign to date, “Good Energy for the Everyday,” while the drink also became the official sponsor for The Amazing Race Canada.

GURU Organic shares have tumbled over the past year and a half, falling from a high of $22 in early 2021 to now just above $5.00. But Ezzat has faith in the company and stock, reiterating a “Buy” rating, saying GURU is still showing signs of strong growth across North American markets.

Ezzat pointed to GURU’s partnership with PepsiCo as one reason to cheer. Signed in 2021 and going for an initial term of ten years, subject to five-year renewal periods, the agreement is for national distribution in Canada. Ezzat said the agreement will significantly broaden GURU’s distribution and reach across the country.

More broadly, Ezzat likes the pace of GURU’s growth within the still-expanding energy drink market. That sector is currently a $15 billion business in North America and it’s the fastest-growing non-alcoholic beverage category, growing at about an eight per cent CAGR. Ezzat also pointed out that 58 per cent of households with children consume energy drinks and millennials and Gen Z’s are driving consumption while also demanding healthier alternatives.

“Capitalizing on these trends, GURU is on pace to more than double revenues in three years and is currently the fastest-growing energy drink brand in Québec’s convenience and gas stores,” Ezzat wrote.

“In early 2018, the Company began implementing its sales strategy in select California markets resulting in early success as evidenced by strong growth in conventional grocery and convenience stores. Namely, GURU is currently the fastest-growing energy drink brand and the top organic energy drink in Bay Area convenience stores (excluding performance energy and private label brands). Our long-term modelling sees GURU gain 1.3 per cent market share penetration in North America in 10 years, yielding revenues of ~$400 million,” he said. 

On the fiscal Q3 numbers, Ezzat said the $7.7 million topline was in-line with his $7.6 million estimate but below the consensus call of $9.5 million. The adjusted EBITDA loss of $6.5 million was less than Ezzat’s forecast at negative $8.7 million as well as te Street’s negative $6.8 million.

Revenues in Canada were down 3.8 per cent year-over-year but grew 23.6 per cent sequentially to $6.7 million. US revenues dropped by 5.3 per cent year-over-year and by 53.6 per cent sequentially, with the company saying the drop in sales was due to “the change in the Company’s Canadian distribution, sales and merchandizing model, and labour availability and logistics constraints.”

Ezzat said he has pushed his forecast for GURU lower on spillover from the logistics constraints along with a tempering of his short- and medium-term revenue growth assumptions. 

For the full fiscal 2022 (year-end October 31), Ezzat is now calling for revenue and adjusted EBITDA of $29.4 million and negative $20.3 million, while for fiscal 2023 he is forecasting $33.9 million in revenue and negative $14.4 million in adjusted EBITDA. 

At the time of publication, Ezzat’s new $9.00 target represented a one-year return of 43.5 per cent.