Wells Fargo: Bai Outlook Optimistic Despite Lowered Expectations

As Dr Pepper Snapple Group’s $1.7 billion acquisition of Bai last November resonated throughout the beverage industry, Bai founder Ben Weiss was hailed as a rock star entrepreneur, and the buzz began about which startup would be the next billion-dollar brand.

But the honeymoon phase has faded and analysts and investors soon gave the acquisition more scrutiny. In April, Dr Pepper Snapple (DPS) lowered top-line guidance for Bai from more than 80 percent net sales growth to 40-50 percent net sales growth. A quarterly earnings call in April put DPS CEO Larry Young and CFO Martin Ellen on the spot as investors sought more details about the company’s revised growth plan for the antioxidant-infused beverage brand and the ability of the Bai management team to deliver on high expectations.

On Tuesday, a report from Wells Fargo Securities offered a clearer analysis of the acquisition, the guidance revision, and the future of Bai, presenting optimism along with some explanations. Wells Fargo Senior Analyst Bonnie Herzog met with Young, Ellen, and DPS’s executive vice president of R&D David Thomas to discuss Bai and other major brands in the company’s portfolio.

According to Herzog, DPS moved on the Bai purchase quickly after a competitor made a much higher offer, putting the company “in play.” DPS previously had acquired a minority stake in Bai in 2015.

The acquisition was announced on Nov. 22, giving the company only two weeks until FY17 guidance was issued — a tight timeframe which “likely did not allow sufficient time to fully understand Bai’s club channel sales and inventory,” according to Herzog. In April, DPS announced it planned to shift Bai’s focus from the club channel (representing more than 40 percent of its sales) to the more trial-friendly C-store channel.

“Ultimately, we think their decisive action to lower expectations and focus on driving trial over [volume] was the right one and are generally confident in the brand’s outlook and ability to positively contribute to DPS’s growth,” Herzog wrote.

Herzog also praised DPS for a number of strategic decisions, including an improved C-store focus, a push to increase trial sales (which, according to Young, has yielded a 50 percent repeat in purchases) and launching Bai in the U.K. DPS also plans to invest more in marketing for Bai; Ellen admitted in April that the company dropped the ball on the retail side following a multi-million dollar Super Bowl ad buy. The company now plans to improve its promos and off-shelf placements, “launching blitz promo teams to drive trial,” according to Herzog.

“Overall, we came away encouraged by DPS’s outlook and [long-term] growth opportunities and on the margin, walked away more constructive on the stock,” she wrote.

In addition to clearing the waters on Bai, the report also noted DPS’s aggressive battle against taxes on sugar-sweetened beverages, which have been adopted by several U.S. cities, including Philadelphia, causing major impacts on soda sales. DPS “appeared confident about their ability to fight future sugar taxes,” Herzog said.

Currently, DPS has no plans to add to its Allied Brands portfolio, which includes BodyArmor, Core, High Brew Coffee and Vita Coco, but is always on the lookout. The company views its allied brands as a way to outsource innovation, Herzog said. Wells Fargo cited BodyArmor as a particularly successful brand, which holds a 2.5 percent value share of the isotonic/sports drinks category.