November 28, 2017 | 9:13 AM by Jay Kunstman | jkunstman@jaguaranalytics.com

Primo Water Corp (PRMW) – High Quality Thirst Quencher

Primo Water is a leading provider of multi-gallon bottled water, self-service purified water refill, and multi-gallon water dispensers. Primo’s products are sold in over 46,000 retail locations throughout the United States and Canada.

I decided to take a closer look at this company yesterday after seeing small, but unusual buyers of 1,000+ January 12.5 Puts for 0.40 on the offer, approximately a $40,000 bearish bet. Based on the company’s Q3 earnings call, there are definitely some near-term risks surrounding margins that investors will need to pay close attention to.

For example, management would report that total gross margin for the quarter was 30.3% compared to 31.2% in the prior year. This decrease was a result of an increased mix of lower-margin dispensers and Glacier Refill sales. In addition, when asked about increased freight costs, CFO Mark Castaneda would say, “During the hurricanes, we did incur additional freight costs in moving bottles around to get to the affected areas, which had some slight impact on the margins, but nothing significantly.”

Lastly, management would say that they believed a total of approximately $2 million in revenue was pulled forward into Q3 related to their dispensers and Water business.

However, based on the overall commentary from CEO Matthew Sheehan, the company looks poised to benefit from a number of upcoming catalysts. Before highlighting those, let’s quickly recap the company’s third quarter:

-EPS of $0.09 vs $0.11 estimate – Miss
-Revenue of $82.20M vs $77.46M – Beat
-Refill sales increased sevenfold to $51.3M (via Glacier acquisition)
-Exchange sales increased 8.6%
-Dispenser sales increased 12.4%
-Raising Guidance for FY 2017

Barrington Research analyst Michael Petusky would go on to maintain his Outperform rating and raise his price target to $19 calling the quarter “strong,” and said shares should be bought now.

Catalysts

In regards to upcoming catalysts, CEO Matthew Sheehan highlighted the following on the call:

Increased Retail Outlets – The company said in the quarter, they added over 500 gross locations. Year-to-date, they have added about 1,600 gross locations.

“In this quarter alone, approximately 70% of the Exchange installs were with Wal-Mart (WMT), with a significant number of the de-installs coming from Kmart in the office-supply channel. This is important, as we believe retail consolidation will continue to impact our net location number, but we have consistently been able to replace them with higher-quality locations. Given this, we will intensify our focus on driving same-store sales activities and selectively remove underperforming locations, which we believe will have a positive impact on our EBITDA margins.”

Barrington Analyst Michael Petusky “And then on the Wal-Mart adds, obviously, great momentum there. I am just wondering, are there any other Wal-Mart’s that you expect to be added between now and year-end ’17?”

CEO “There could be as much as a couple of hundred, and that’s probably going to take a few quarters to get through. We’re getting close to a good level of penetration there. So there is still some left.”

M&A – Management said they will continue to look at smaller acquisitions in the Refill segment that will provide location density in certain markets as well as earnings leverage. For example, this year, they completed a small acquisition in the Southeast at an EBITDA multiple under 5x. They will actively seek regional tuck-ins where they make the most sense and financially fit their acquisition profile.

Revenue-Enhancing Activities – The company said they remain on track in pursuing cross-selling between Exchange and Refill as well as pricing tests in Refill. They have begun to deploy regional pricing test as previously communicated throughout the U.S., mostly in the outdoor Refill space. Primo believes these tests represent a solid cross section of our locations that will help guide deployment as well as additional areas needing test modifications.

Payment Technologies – The company is set to begin their payment test in Q4 that will work on upgrading test sells of locations to include various forms of credit card and e-wallet technologies, alongside today’s cash methods. While Refill is a very considered purchase, they believe more consumers would be attracted with modern payment methods.

Point-of-Purchase Signage – In addition to using the in-store presence to help connect water and dispensers, they have been testing 3 different messaging concepts in regional test sells. The company believes their test data supports a winning concept, which they will begin to roll out in select accounts early in 2018.

#PRMW#WMT
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