Why the Yowie Group Ltd share price rampaged higher today

Shares in chocolatier Yowie Group Ltd (ASX: YOW) jumped 6% to $0.83 today after the company released a very positive quarterly report. Much of the information has already been released to the market, but here are the report’s highlights:

(All figures are in US dollars)

  • Sales receipts of $3.99 million
  • Net operating cash flows (sales minus staff + material costs and cost of production) of positive $1.25 million
  • Second quarter of overall positive cash flows
  • Production successfully commenced at Madeleine Chocolate factory
  • Secured distribution in 6,500 Walgreens stores, taking store total to 23,000 – 25,000
  • Signed film producer Bruce Davey as creative consultant for potential Yowie spin-offs
  • In addition to film, Yowie investigating other avenues like books and TV series, etc

So What?

Yowie sales have quintupled since the same period a year ago, despite some business troubles including litigation and a change of chocolate manufacturer. Sales were boosted by the Easter period and heavy promotional activity during this time, with this quarter representing the first time marketing support was initiated for the brand.

Despite the strong Easter performance, Yowie appears likely to achieve further growth in coming quarters thanks to the recent signing of Walgreens, where sales and stocking are still ramping up (Yowie is currently in 6,400 of 6,500 Walgreens stores).

One broker estimates there are around 40,000 ‘Tier One’ accounts that Yowie could potentially be stocked in, as well as 150,000 convenience stores (which sell fewer units per week), providing significant potential for sales growth.

The risks

Yowie is a high-risk investment. Key risks are losing important clients, failing to be granted a patent for its chocolate capsule, adverse findings in ongoing litigation, and of course, competition. The recent appointment of a creative director adds further risks around the effective use of shareholder capital. In general the creation of a ‘culture’ (movies, books, toys, etc) around the Yowie figures could be a significant positive in many ways – however, investors will want to keep a close eye on how aggressively management is spending to chase that dream.

Despite the recent rise, today’s price appears undemanding, and is below what I initially bought Yowie shares at. For risk tolerant investors, Yowie could be an interesting high-risk, high-reward investment.

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Motley Fool contributor Sean O'Neill owns shares of Yowie Group Ltd.. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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