Knobias Clip Report (02-26-2008)
Submitted By Knobias ClipReport
COT: Shares Plunge 36% on Shelf Space Negotiations with Wal-Mart
As the economy slows and the population begins to feel the pinch, many begin to cut their spending habits to make ends meet. Some will forgo eating out to dinner while others will spend less in the entertainment area. Others might just shop at lower cost places instead of upscale establishments. One area that is seeing that phenomenon is retail. Many have begun to use Wal-Mart instead of higher priced grocery stores for food. The Company has also seen increased demand for their lower priced electronics. It makes sense that people flock to lower priced stores in tough times and if the location is efficient and as everyone knows, there is a Wal-Mart in most cities.
But one area the phenomenon does not hold is drinks. On Tuesday, Cott Corporation (COT), the world’s largest retailer brand soft drink provider, released some disparaging news. As everyone knows, if Wal-Mart announces that they will carry a product from a small manufacturer, that company’s stock will see a huge surge in buying in price. Just the speculation regarding a Wal-Mart distributorship will send shares soaring. Well the opposite is true as well. Cott reported that speculation regarding its shelf space in Wal-Mart stores was true.
The Company is the maker of the private label brand Sam’s Choice in Wal-Mart stores. The product accounts for some $700 million of the Company’s revenue or 40%. Cott announced that it has received notice of a reduction in shelf space and merchandising support for Wal-Mart’s private label carbonated soft drinks in the U.S. How much shelf space and support from Wal-Mart was not officially announced but speculation suggested that if the Company lost 4 feet of shelf space, it would suffer a loss of around 10% of revenue.
Following the announcement, analyst suggested that neither new products nor contract wins would fully offset the loss because of Cott’s significant portfolio exposure to carbonated soft drinks. UBS downgraded their rating on the firm from a Buy to Neutral. Standard & Poor also revisited their ratings and placed a ‘B’ rating on the Company’s long term corporate credit and a ‘CCC+’ rating on its subordinate debt.
Cott did note that the 2008 programs had not yet been finalized and that the Company was still actively negotiating with Wal-Mart appropriate space allocation and other merchandising programs associated with the Sam’s Choice brands.
But with the pinch being felt by consumers, one would assume the Sam’s Choice brand would see increased demand which leads many to believe that the problem Wal-Mart has with the product lies in either quality or price. In any event, the announcement culminated in shares falling by almost 37% on heavy volume. With a positive resolution to the negotiations, shares could easily see increased price spikes with the number of shorts accumulating in the name. The risk is obviously the follow through by Wal-Mart on the loss of shelf space regulation or using a completely new producer for the private label brand. In either event, the name is certainly one to watch over the coming days. Investors would be wise to watch.
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