Reed’s, Inc.’s rebranded Virgil’s soda line helped spur a 29 percent increase in gross margins in the third quarter, CEO Val Stalowir told investors during the company’s Q3 earnings report this week.
Since losing between 15 and 20 percent of its distribution in 2016 due to stocking issues, California-based Reed’s has been in rebuilding. In January, the company announced it was putting its Los Angeles manufacturing facility up for sale, cementing its change from a production-based to sales and marketing-based business structure. The company is now in the “final stages of the process” of exiting the facility and expects to complete the transition by the end of the year, Stalowir said on the call.
“As we discussed over the past few calls, we’ve been diligently executing the business model optimization plan that will create a solid and scalable foundation from which to drive improved margin performance and sales growth,” he said. “This new business platform will allow the company to invest increased capital in sales and brand building resources and initiatives.”
Stalowir said Reed’s has multiple bidders for its L.A. facility. The company is also in negotiations to add an additional co-packer on the West Coast to decrease its dependency on the current facility.
This year has seen the introduction of several new innovations from Reed’s: Along with the Virgil’s rebrand and the launch of a sugar free subline, the company in October launched a new package design for its Reed’s ginger beer line. According to Stalowir, buyer interest in Virgil’s Zero Sugar helped Reed’s to open 1,100 new doors in Q3, including in regional grocery chains such as Stop & Shop, Market Basket, Tops, Big Y, and King Cole in the Northeast, and national chains including Wegmans, Giant Carlisle, and Earth Fare. The addition of these new accounts follow distribution gains made during Q2 in Target and Kroger, where Stalowir said Virgil’s Zero Sugar is nearly matching the velocities of the Virgil’s full-calorie products. He also noted that the company only began promoting and offering coupon deals for Virgil’s Zero Sugar in September.
With Virgil’s Zero Sugar serving as one of the major drivers of growth in the quarter, Reed’s is now moving ahead with the launch of Reed’s Zero Sugar ginger beers in bottles and cans, which Stalowir said are set to rollout in Q1 2019.
“We are very pleased to have most of our transformation efforts behind us, so we can now fully focus on the second phase of our value creation plan which is to invest in sales and brand building activities in order to expand our leadership position in two of the fastest-growing categories in beverage,” he said.
While the two core brands generated 3 percent growth during the quarter, net sales decreased 1 percent to $10.8 million, according to CFO Iris Snyder, who said the decline is due to SKU reduction the company undertook last year and a shift in sales of private label products from Q3 to Q4.
However, a higher revenue per case and a 9 percent decline in cost of goods sold per case generated a 30 percent increase in gross profit, Snyder said. Operating losses during the third quarter dropped to $2.1 million from $3 million last year.
During Q&A portion of the call, Stalowir was asked how Reed’s views the emerging trend of cannabidiol (CBD) infused beverages and whether the company is exploring developments within the space. He denied any immediate innovation plans and said the company will consider it if and when Congress passes the U.S. Farm Bill and clears the path to full legalization for the hemp-derived functional ingredient, but until that time most of the company’s major retailers won’t touch it.
“We have 30,000 distribution doors,” Stalowir said. “And we are looking at functional beverages. Ginger is a superfood, it’s a functional beverage, it’s all-natural. It has sort of a counterculture brand image. And so, of course, we are looking at all fast-growing new breakthrough ingredients. And so we are looking at all that space. We are looking and learning in that space in general. So from that standpoint, we are doing the good diligence that our management team should be doing in beverage and evaluating sort of breakthrough ingredients and/or offerings.”