Shares in Fevertree Drinks (FEVR:AIM) crashed by 8% to £22.55 after the tonic water specialist warned that inflationary pressures would eat into its profit margins.

Companies are increasingly talking about extra costs related to raw materials or shipping, and a divide is occurring between those who can pass on those costs to the customer in the form of higher selling prices or those who must stomach some or all these costs themselves.

Fevertree is trying to expand its share of the US and Continental European markets and so it may feel that now is not to the time to try and push up prices to cover the extra costs.

Stockbroker Numis says 39% revenue growth in the first half of 2021 is ‘impressive’ given the challenging operating environment and strong year-on-year comparative figures to beat, given how last year’s period benefited from a surge in people buying its products to drink at home.

However, Numis believes the margin pressures will cause a substantial negative impact to its earnings for some time. As such, it reduces its earnings per share estimates for 2021 by 10%, by 22% for 2022, and by 11% for 2023. The scale of those earnings downgrades goes some way to explain the sharp decline in its share price following the trading update.

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Issue Date: 20 Jul 2021