Here's Why Primo Water Corporation Dropped as Much as 12.7% Today

By Maxx Chatsko Markets Fool.com

What happened

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Shares of Primo Water Corporation (NASDAQ: PRMW) went on a roller coaster ride today, slumping nearly 13% before recovering sharply, then resuming their slide. Thewater products company reported first-quarter 2017 financial results that showed strong sales growth -- with year-over-year revenue growth of 88% -- thanks to the inclusion of Glacier Water products, but its top line progress was eclipsed by a 108% increase in operating expenses.

Naturally, that had a significant impact on the bottom line. Swelling expenses resulted in a net loss of $11.8 million, or $0.37 per share, for the quarter. But there was some good news in the mix for investors, too. Some of the expenses were non-recurring costs related to the Glacier Water acquisition. Additionally, gross margin actually increased during the quarter, and management raised its expectations for 2017 adjusted EBITDA. The stock closed Wednesday with an 8.6% loss.

Image source: Getty Images.

So what

Primo Water Corporation achieved Q1 sales of $60.7 million, compared to just $32.3 million in the year-ago period. Heck, full 2016 sales totaled just $142.5 million. That goes to show the immediate impact of the Glacier Water acquisition, which was announced in October.

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Here's a more complete look at the important financial results from the latest quarter:

Metric

Q1 2017

Q1 2016

% Change

Water revenue

$53.1 million

$22.4 million

137.3%

Dispensers revenue

$7.6 million

$9.9 million

(23.1%)

Total revenue

$60.7 million

$32.3 million

88.1%

Cost of sales

$42.8 million

$22.9 million

86.6%

Selling, general, and administrative costs

$10.5 million

$5.0 million

109.7%

Non-recurring acquisition-related costs

$4.4 million

$0.2 million

N/A*

Total operating expenses

$64.2 million

$30.8 million

108.5%

Interest expense

$5.0 million

$0.5 million

N/A*

*Impractical comparison. Source: Primo Water Corporation.

The full results show exactly what sank Primo Water during the first quarter of 2017. First, total operating expenses exceeded total revenue by $3.4 million. The good news is that this operating loss turns into a gain of $1 million when one-time acquisition-related expenses are excluded. It isn't much, but it shows that there is room for improvement. That's especially true when investors consider that selling, general, and administrative costs will decrease slightly as Glacier Water is fully integrated into operations.

Second -- and this will be a longer-term headwind for investors -- was the significant amount of money going to interest payments on the debt that made the Glacier Water acquisition possible. This is a necessary evil to access higher rates of growth, but at the current pace, it will amount to $20 million, or $0.67 per share, in 2017. Investors knew that interest expenses would increase significantly this year, but the impact was compounded by higher than expected expenses in the quarter.

Now what

Long-term investors shouldn't be worried just yet. Operating expensesshould decrease by a moderate amount as Primo Water fully integrates Glacier Water into operations over the next several quarters. That will aid the bottom line in the near future, as would continued growth from both the legacy business and the recent acquisition. If solid revenue and earnings growth is demonstrated in the next several quarters and years, then the company should have no problem refinancing its debt at lower interest rates. First things first though.

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Maxx Chatsko has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.