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A surge toward private-label beverages has translated into strong interest in Cott Corp., BCB-T with investors pumping up the company's shares by 215 per cent so far this year. It hasn't been an easy road for the beverage maker, with significant challenges still ahead.

"The U.S. business is in the midst of turning around," UBS analyst Kaumil Gajrawala said yesterday as he raised his price target to $5 from 90 cents.

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"[But]although the U.S. business improved in the quarter from consumers seeking better value and industry trends rebounding, Cott's international business continues to face challenges due to increased promotional activity, macro pressures and foreign exchange."

Here's a look at the company's challenges and opportunities.


If you've purchased cheap pop from a retail outlet, chances are you've consumed a beverage manufactured by Mississauga-based Cott Corp. The company makes non-alcoholic beverages that are supplied to large retailers to be sold as private-label brands. It also produces bottled and flavoured water, juice, energy drinks and tea.

Why have its shares popped?

Cott reported a first-quarter profit of $20.8-million or 28 cents a share Friday, far exceeding analysts' expectations of a 5-cent loss. That compared with a loss of $20.9-million or 30 cents a year ago. Revenue was down 5.8 per cent to $367-million, which the company attributed to a stronger U.S. dollar.

The company's shares, which hit a 52-week low of 74 cents in December, yesterday matched their 52-week high of $5.12 set last May, before closing at $5.05.

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"After two to three years of enduring the perfect storm of weak industry volume fundamentals and an elevated input cost environment, not to mention a loss of focus on the core business, the fizz may have finally returned in Cott's business and stock price," BMO Nesbitt Burns analyst David Hartley said, as he increased his price target to $6 from $1.

"We believe it is a much better bet today to announce that a turnaround is under way. Trends in private-label volume growth and commodity input costs appear to have turned favourable."

Lower commodity prices and higher prices for its products have helped the company stabilize its operations, said CIBC World Markets analyst Perry Caicco, and Cott has worked hard to lower its overheads. In June, Cott said it would cut jobs, shutter some bottling lines and reduce administrative costs by up to $22-million.

Seven analysts follow the shares, according to Bloomberg, with four "buy" ratings, two "holds" and one "sell."

The Wal-Mart question...

As of the end of 2008, Wal-Mart accounted for 35 per cent of Cott's North American business. The relationship hit a hurdle early this year, however, as the world's largest retailer said it would no longer rely on Cott as its exclusive supplier in the United States. The expected blow wasn't delivered in the first quarter, however, with Cott saying North American volumes actually increased by 4.6 per cent.

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"A good portion of this achievement is luck, as Cott is benefiting from a recessionary consumer trading down into its cheaper products," said Mr. Caicco, who bumped his 12-month price target to $4 from $2.25, and rates the shares a "sector outperform."

Wal-Mart's termination agreement says the change will be phased in over three years, leaving Cott with at least two-thirds of its business through this year and one-third the year after. It's essential Cott move quickly to rebuild the relationship over that time, Mr. Caicco said.

"The challenge for Cott is to build on this success before the recession ends by bringing maturity into its approach and service back to its accounts," he said. "The other good news is that U.S. retailers are getting serious about private label again. This happens like clockwork every five or six years, and does result in more shelf space ... and more promotional focus. Again, Cott needs to exploit this brief interest before it wanes."

The future

While the quarter was a good one, chief executive officer Jerry Fowden warned it was helped along by one-time bumps from deferred spending, lower commodity prices, and tax benefits.

He also warned that as the economy improves, competitors such as Coca-Cola and Pepsi will see their sales improve.

"I remain keenly aware that one good quarter does not make a successful turnaround," he said during a conference call.

"We still face challenges in the competitive environment, our capital structure and customer base."

And while the company saw 4.6-per-cent growth in its beverage case volume in North America, volume dropped 9.8 per cent in Britain and 26.3 per cent in Mexico.

"We are cautious on the continued issues in the international business and the outlook in the back-half of the year as branded bottlers ratchet up promotional activity," Mr. Caicco said.

"Early indications are that performance of the U.K. business is improving. The same cannot be said of the Mexican business."

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