by Marc Robins CFA
Nearly two decades ago, I was the CEO of Moonstruck Chocolate for about a year. The Robins Group had been associated with the upstart Chocolatier helping to raise money, give guidance and on a more personal note sponsor and co-finance the “new” Chocolate Café that opened on 23rd Avenue in Portland’s Pearl. By far, it was one of the best and most fun projects I was ever associated with.
That’s where the fun ended and the work began. Let’s just say that one of those “Too Many Cooks Spoil the Soup” situations occurred with a revolving door attached to the CEO’s office and “help” from well-intentioned, but divisive relatives confused the growth strategy and…..Well, let’s just say I was to rebuild the balance sheet or sell the assets.
Did I mention 9/11 of 2001? Well, let’s just say my executive role was cut short. I had to sell the biz (which was not so good) and my, and my family’s, beloved store (which was a great thing)was sold to the buyer.
But everything is a learning experience. We learned about confections, brand, retailing, egregious profit margins….everything. Our “learning” taught us about providing consumers with a “substance” with a great profit margin that was craved but not addictive. Please forgive me if I say, I learned that chocolate to post-menopausal women is practically as addictive as coffee and cigarettes.
That brings us to our stock pick of the month. Eastside Distilling is an upstart craft distiller out of Portland, OR that just about has the whole formula for cracking the consumer distilled spirits market down pat: A good product, Brand, good (not great) profit margins, marketing, and distribution…critical factors for creating a very successful product and company.
They now produce 14 different, award-winning bottled spirits, which includes Burnside Bourbon, Burnside Bourbon Oregon Oaked, Barrel Hitch American Whiskey, Barrel Hitch Oregon Oak American Whiskey, Portland Potato Vodka, Below Deck Rums, Cherry Bomb Whiskey, Holiday Peppermint Bark Liqueur and other offerings. You get the idea though. Their spirits offerings are very diverse, well thought of by “experts”, and best of all being well received by a desirous market. And, they’re tasty. I’m not a connoisseur, but the master distiller, Mel Heim, performs unbelievable magic that is appreciated by experts in some of the most discerning markets.
Let’s focus on that “market” and the Company’s relatively recent success. This stuff (and I happen to like their products but wish they produced a quality gin) is selling like hotcakes. Last year, they generated $1.7 million in top-line revenue up 60+% from 2014. Given case volume, this little newcomer ranked third in Oregon’s line-up in spirits producers. Additionally, the rate of growth is more startling when you consider Eastside had an extraordinarily weak balance sheet and no free working capital. But more on that below.
The other point that I failed to mention that is critically important for this story is practically all of 2015 sales were done in just the state of Oregon. That has changed. A new partnership with a major spirits distributor, Eastside now has market access to 20 states including some of the top, distilled spirits consuming regions. Sales are being made into NY, CA, NV, WA, and of course Oregon but also another 15 states are on the verge of ramping demand. For instance in the last quarter where the period’s net, top-line was up 66%, sales outside of Oregon amounted to 41% of the whole versus the second quarter a year-ago where it only contributed 5%. One should expect the new markets to not only add to sales breadth but ramp individually with volume over time. Three is no reason why any of the listed states couldn’t individually exceed the sales volume of Oregon as demand in Oregon also grows. In addition, there is already thoughts of selling their brown spirits into Canada and Asia.
Now, the bad news. Up until June, Eastside was a company that had grown out of its balance sheet. Let’s say, “Things were tenuous.” Indeed, the shares that were selling at $2.28 just over a year ago had hit a low of a nickel. Outside investors have entered with well over $2 million with fresh cash in equity and debt completely rebuilding the balance sheet. Is it well? No, but the patient is much better, but still losing money.
This is a very risky stock venture—and consider this seriously before making any investment, but the Balance Sheet is far “less worse”, the product sales should actually accelerate their pace, Eastside is coming into their seasonally stronger part of the year, and it appears that the operation could break-even late next year. Eastside shares are a wild speculation here, but certainly a company and stock that deserves careful scrutiny and surely watching.
Robins and his family are shareholders of ESDI and has done some consulting for the firm. In addition, ESDI attended his Robins Equity Round-up last Fall where the company presented, acted as a sponsor and helped host the Kick-off Bar-B-Que.
by Marc Robins CFA