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Tuesday, November 25, 1997
Odwalla Inc.
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Phone: 650-726-1888
Website: http://www.odwallazone.com
Price (11/24/97): $7 1/2
HOW DID IT FIND TROUBLE?
Tragedy is the cruelest path to a debacle. For the once hip juicemaker Odwalla, it came in the form of an E.coli bacteria outbreak linked to its line of apple juice. Last October 40 people became ill after drinking the tainted juice and a 16-month-old girl died.
The day the company announced the news and the voluntary recall, shares were squeezed from $18 3/8 to $12 1/8. The October 30, 1996 plunge was headline fodder, and as old news falls beyond the scope of this Trouble.
The key is that despite the turmoil, investors figured the dip was a buying opportunity and had bid the shares back up $16 a month later. It was a shortsighted binge as the new shareholders did not think through the long road ahead for the company -- from the lawsuits to the deteriorating brand image.
Sir Isaac Newton discovered the law of gravity under an apple tree. Centuries later investors would learn the same physics lesson under the stock of an apple juice purveyor.
BUSINESS DESCRIPTION
California's Odwalla sells about 30 different lines of fresh and organic juices in the West Coast market. The company also sells its Geothermal Spring Water and this spring introduced Future Shake, a meal replacement beverage.
FINANCIAL FACTS
Income Statement
12-month sales: $52.7 million
12-month income: ($12.4 million)
12-month EPS: ($2.49)
Profit Margin: N/A
Market Cap: $40.5 million
(*Including recall charges)
Balance Sheet*
Cash: $3.3 million
Current Assets: $16.2 million
Current Liabilities: $11.8 million
Long-term Debt: $0.4 million
(*As of May 31, 1997)
Ratios
Price-to-earnings: N/A
Price-to-sales: 0.77
HOW COULD YOU HAVE SEEN IT COMING?
Accidents happen. A medical mishap is not something one can realistically anticipate. The real head-scratcher came as investors charged back into the battlezone with buy orders.
To Odwalla's credit, the company was as proactive as one could be. While a mandatory recall may have been in the works anyway, the company was quick to pull not only the suspect apple juice but also every other line produced at the processing plant. It was the right thing to do. Still, a company like Odwalla that had built up brand name equity in something as commodity-like as fruit juice and was able to command premium pricing based on the its label clearly would suffer from the incident.
A day after the recall, in the Industry Weekly Update, I wrote, "Goodwill took a beating even if the company showed goodwill by acting quickly and beyond what was required. People will applaud but keep their distance... for now."
The run back to $16 took me by surprise since there was a predictable string of events that had to take place before the company was ready to bounce back. Once the product was cleared and put back on the shelves sales would certainly drop off -- and they did. Morale at the company would have to be shaken -- the Chief Operating Officer resigned in March. With all of the consumer casualties, lawsuits had to emerge -- and a little more than half of those have now been settled. As late as this summer, a federal grand jury began a probe of the October incident.
It was clearly too early to jump back in expecting the turnaround to be immediate. Those who got in last November were sitting ducks, but those who got in this November, now that the company has shown tangible signs of a turnaround, might be sitting ducky.
WHERE TO FROM HERE?
A mortal E.coli outbreak brings back the lessons learned from Jack in the Box's parent company Foodmaker <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FM)") else Response.Write("(NYSE: FM)") end if %>. Four years ago a similar tragedy found that company teetering on the brink of bankruptcy. Yet the company soon became the innovative leader in food safety and, while it took plenty of strong quarters to finally convince the investing community that Jack was back, shares of the burger chain eventually bounced back with a vengeance.
Odwalla has been no different. After extensive research, the company settled on flash pasteurization as the method to ensure the safety of its juices while preserving the natural flavor.
While it took Foodmaker more than two years before its stock bounced back, Odwalla may not have to wait that long. Sales have been as sluggish as can be expected given the circumstances, but they are improving. While revenues were off 17% in each of the two previous quarters, they are now down just 10%. Time heals. With every passing week more consumers are putting Odwalla juices back on their shopping lists with confidence.
The comps from here will improve dramatically now that they are going to be compared with the post-recall sales figures. While analysts are not expecting the company to return to profitability until spring, it is at least a nod of faith from the financial community.
Meanwhile the company is diversifying its offerings. While the juice line has been soft, the company's drinking water sales have grown 20% this year. In May Odwalla introduced Future Shake. Billed as a "meal in the bottle" and geared towards the meal replacement market, it is actually an exotic protein shake. The first one introduced, Vanilla Al'mondo, is a "sweet and creamy blend of almond, soy, and organic oat milks, flavored with real Madagascar vanilla, banana and mango."
It is in keeping with the company's organic presence while creating a product catering to an entirely different niche than its juice line. With a new Odwalla line to blunt recollection of last year's unfortunate tragedy and with sales improving, the name of the new nutritional beverage is fitting. The future should shake up the share price -- eventually higher.
-Rick Aristotle Munarriz
([email protected])
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