We are short the Vita Coco Company (NASDAQ: COCO), because, in our opinion, Vita Coco is nothing more than a one-trick pony grazing in a niche TAM. The stock is hyped as a unique growth story in the ‘Better for you’ beverage segment, but in 2024 sales just grew 4.5% YoY (vs. category at 15.4%) and its market share has been falling since early 2023. Compounding the problem, we uncovered that Costco, Vita Coco’s largest private label customer, will ultimately terminate its contract with the company, despite having renewed their partnership in 2023. This decision will result in an estimated $90 million revenue shortfall for Vita Coco by the end of 2025 and position Costco as its strongest competitor. Vita Coco is suffering from structural internal deficiencies, such as undisclosed related-party transactions and supply chain mismanagement. We believethe company focuses on misleading the markets while insiders offload stock.
In our opinion:
Vita Coco is an operational basket case
- In its IR materials, the company talks up the competitive advantage afforded by its supposedly inimitable supply chain. In actual fact, Vita Coco has been suffering inventory shortages of its own making in 2024 so severe that retail partnerships have suffered – as have sales.
- Vita Coco’s CEO has said that retailers are “upset” (his words) about how they handled the supply chain for the branded and private-label products. The summer and fall seasons lacked inventory.
- Walmart has already moved Vita Coco’s branded products to a less frequented aisle and has materially reduced SKUs, resulting in a double-digit decline across all Walmart stores.
Vita Coco’s private-label story doesn’t stack up
- Bullish investors think that some small private-label customers will terminate some specific regions in 2025. However, we discovered that it’s Costco, Vita Coco’s largest private-label customer. The retailer is terminating its private label partnership. Costco accounts for around 25% of net sales.
- In our opinion, disgruntled Costco will terminate once and for all in 2025 after Vita Coco failed to deliver reliably last year. Costco will go from being a steadfast customer to a fierce competitor this year.
- The company had already terminated the agreement once but then retained it only as a stop-gap while it built an alternative supply chain. Through import records, we have uncovered that Costco is moving to source Kirkland Coconut Water from a Vita Coco competitor.
- The contract termination will trigger a cascading financial crisis for Vita Coco, losing $90 million in private-label revenue and destroying a sophisticated cost-sharing logistics model that supported Vita Coco’s gross margins.
- In light of declining consumer confidence and Vita Coco’s planned price increases on its branded products for 2025, Costco and other private label competitors will capture substantial market share from Vita Coco.
Vita Coco misled investors about market share, growth, and performance
- In past years, any statement touting market domination had to be retracted: With new statistics showing that previous claims of 51% market share were incorrect, Vita Coco has been forced to concede that its US market share is lower than estimated.
- In the last two years, Vita Coco’s market share has fallen steadily, from 45% in 2023 to just 41% in 4Q24.
- The same applies to US MULO+C numbers: the company’s US MULO+C growth has been falling since 2022 and most recently, Vita Coco ceased disclosing benchmark figures which raises questions if the company tries to conceal that it’s underperforming the overall coconut water category.
- Through sell-side data, we can estimate that overall category growth at the end of 4Q24 was 21.8% for L13W, 17.8% for L26W, and 15.4% for L52W and was therefore considerably higher than Vita Coco’s self-reported growth of 9.3% for L13W, 5.5% for L26W and 8.2% for L52W.
Vita Coco’s dodgy diversification attempts have failed
- Vita Coco has failed to diversify from its core product coconut water. The company slashed 60% of its product portfolio since its IPO in October 2021.
- Neither coconut-related nor other products have gained traction: its Diageo collaboration ‘Vita Coco Spiked’ “has not been incredibly successful” (chairman’s words), its fitness drink ‘PWR LIFT’ was pulled from the shelves, ‘Runa’ was axed in 2023, and its ‘Ever&Ever’ water has been paused indefinitely.
Vita Coco misled investors about its 2018 acquisition of energy drink ‘Runa’
- Vita Coco’s IPO prospectus failed to disclose that then-CEO and now-Chairman Mike Kirban personally invested in Runa in 2014. We believe Kirban significantly profited when Vita Coco bought Runa in 2018. This was an undisclosed related-party transaction.
- The Runa acquisition has since proved disastrous, yet on its balance sheet, Vita Coco refuses to acknowledge that $7.7 million of goodwill related to Runa must be written off. Vita Coco would not have exceeded investors’ EBITDA expectations if the company had correctly written off the goodwill.
- The company hid the consequences of this disastrous M&A transaction by removing disclosures and specific language from its SEC filings. This is an excellent example of how Vita Coco is playing games with investors.
Vita Coco’s markets-focused short-termism has run its course
- Since 2023, Vita Coco has repeatedly changed growth stories, switching from branded sales to private-label business and then to international markets as its growth driver. In our opinion, while Vita Coco succeeds in influencing Wall Street’s perception of the company each quarter, it lacks a consistent strategy to achieve its long-term goals.
- As a look at the data shows, in fact, Vita Coco has failed to meet its target of MDD+ growth for its branded products in the last five of six quarters.
- After prolonged single-digit growth, the revenue surge in 4Q24 does not reflect actual consumer demand, but rather the aggressive restocking of inventories by distributors and wholesale customers.
Vita Coco’s executives cash in on illogical company valuation
- Looking at the valuation, all of Vita Coco’s peers are more diversified, growing at similar rates, and trading at lower multiples.
- Considering that Vita Coco doesn’t have a diversified product portfolio like its peers, we applied a ‘One-Trick Pony’ multiple to reflect that fact, resulting in around 49% downside for the stock.
- Its CEO swiftly liquidated $20.6 million in stock after Vita Coco raised its revenue guidance. Other Vita Coco insiders followed suit and in total, insiders have sold more than $58 million in stock.
Talking a good game, Vita Coco likes to give the impression that it has a growth plan based on an unbeatable supply chain advantage and a stable of strong products able to win races in a variety of markets. In our opinion, however, Vita Coco is a one-trick pony – one that now can’t even perform its trademark crowd-pleaser.