While customer demand for Reed’s products has grown, the company was hit by supply chain shortages during the second quarter of 2019 which resulted in an underwhelming growth report and delays on new product launches.
Speaking to investors during an earnings call yesterday, Reed’s CEO Val Stalowir said the company experienced “downtime” in June at all three of its co-packing partners. On the East Coast, downtime resulted from “packaging failures” as the company transitioned from paper to pressure-sensitive labels for its glass-packaged products. Stalowir said Reed’s encouraged the downtime in order to properly accommodate the label change. However, the company also saw unplanned downtime at two West Coast co-packers as equipment installations took longer than planned.
“While a single shortfall may have been overcome, the concurrence of events at all three existing co-packers had a meaningful and relatively sudden impact on our inventory,” Stalowir said. “Our current co-packer footprint was not robust or flexible enough to sustain the one-time issues that came our way. We need to build additional redundancy and flexibility into our supply chain infrastructure and are now laser focused on expanding our co-packer relationship to fulfill short-term shortages and ensure there is sufficient and flexible capacity to support our long-term growth expectations and new innovation.”
Reed’s reported just 1% net sales growth to $9.5 million in the second quarter, which Stalowir noted was also impacted by the company’s move to discontinue underperforming SKUs and the divestment of its private label business at the beginning of the year.
Core brand gross revenue grew 13% in the second quarter, but would likely have grown 28% if not for the supply chain shortages, Stalowir said. Volume sales for Virgil’s soda grew 22% in the quarter, while volumes for the Reed’s brand grew 7%, however prior to the shortage the brands were predicted to grow 43% and 15% respectively. During the quarter, about $1.1 million of core brand sales orders went unfulfilled.
Stalowir said the company has developed strategic plans to deal with future supply issues, including partnering with additional co-packers. While Reed’s three core co-packers are now operational and increasing production, the company is still working to recover from the stoppage and has lowered growth expectations for 2019 from 32% to 30%.
Following the report, Reed’s stock price dropped 29.33% on Wednesday to $2.12 per share.
Reed’s has also delayed the launch of its 16 oz canned line as well as the planned expansion of its Reed’s Zero Sugar line in order to focus on normalizing the supply for its core products.
Last week, the company added PepsiCo senior treasury manager Lou Imbrogno to its board of directors; Stalowir said he will help Reed’s to navigate its supply chain issues.
“Lou’s experience in relationships will be invaluable,” Stalowir said. “In fact, Lou has already been able to open the dialogue with additional co-packer partnerships that we are now pursuing.”
Despite supply issues, Reed’s continued to expand distribution in the second quarter, adding about 2,300 doors, including 1,000 Walmart locations nationwide. Stalowir also called the rollout of the brand’s hemp-infused ginger beer to select markets “successful.” The brand, he said, is also still on track to launch a line of Ginger Wellness Shots in the fourth quarter, which will utilize a separate manufacturing supply chain. However, the launch of its alcoholic ready-to-drink Ginger Mule line has been delayed until the end of the year.
“In the second half of the year, we continue to expect double-digit growth of our core brands,” Stalowir said. “We remain committed to driving shareholder value of establishing long-term relationships with all of our investors. We are confident with our plans and are pushing hard to build our brands and drive increased growth.”