After announcing preliminary results which fell shy of analysts' estimates back on January 13th, SodaStream (SODA) is set to report its audited Q4 2013 results on Wednesday February 26th. The chart below outlines the reduced analysts' estimates for the quarter, full year and 2014.
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As investors can clearly see, upon releasing preliminary results, analysts are now only expecting SodaStream to report earnings of $.01 per share on roughly $167.33mm in revenues for the quarter. While revenues are expected to show a record revenue quarter for SodaStream, profitability and net income are expected to be almost nothing in the quarter.
On January 13th, SodaStream's press release regarding its preliminary results noted the following:
"Despite achieving all-time record sales, we failed to deliver our profit targets and are disappointed in our fourth quarter performance," said Daniel Birnbaum, Chief Executive Officer of SodaStream. "These preliminary results reflect a challenging holiday selling season in the U.S. and several factors, mostly from the second half of the quarter that negatively impacted our gross margin. These include lower sell-in prices and higher product costs, a shift in product mix versus plan, and unfavorable changes in foreign currency exchange rates. While we expect some of these headwinds to continue into the first half of 2014, we are moving quickly to implement the necessary measures to restore margins to historical levels in the coming year. We remain confident that despite this setback, we will continue to profitably expand our share of the global carbonated beverage category and are on the right path to meet our long-term goals."
With dismal preliminary results and the threat of continued pressures on the company through the first half of 2014, shares of SodaStream plunged more than 30% since January 13th. Most investors have had little to go on since that time, but for the sake of a few comments from the CEO noted in the preliminary results press release outlined above. For those investors who had the opportunity to chat with company officials at the ICR Exchange later in January, they had a little more to go on.
Discounting Impact
Since the date SodaStream released its preliminary results, we have yet to see the ability for a media outlet or an analyst to better engage investors on what really happened during Q4 2013 which resulted in nearly all net income and profitability erosion. You have heard the saying or the phrase "law of large numbers" right? Well the same thing applies on the opposite end of the spectrum with the impact of small numbers. Investors should always keep in mind that SodaStream reports less than $170mm in revenues each quarter, yet has a global operation consisting of over 46 countries. The company is also looking to expand regionally in 2014 and gain a more favorable direct distribution mix. Additionally, and as they have noted in the past, they are always looking for opportunities to grow their user base. At differing times in the business cycle, this might mean that the company forgoes profits in the short term and focuses on growing its user base for greater profitability in the long term. So what does that mean and how can investors better gauge this in juxtaposition to Q4 2013 results?
SodaStream noted they witnessed a decline in sell-in prices during the quarter. In other words, the firm reduced prices or discounted its starter kits in order to help its retail partners sell more products during the 4th quarter. SodaStream had reported an average of $13.7mm in net income through the first 3 quarters of 2013. Remember, this is where understanding the impact of small numbers comes into play for investors as $13.7mm is not a lot of net profit when compared to other companies like a Green Mountain Coffee Roasters (GMCR) or a Monster Beverage Corporation (MNST).
SodaStream's preliminary results showed the company would earn roughly $200,000 in the 4th quarter of 2013. Here is what likely occurred during Q4 that effectively eroded the net profitability down to this number. In Q4 of 2012, the company sold 1.11mm soda maker kits and in Q4 of 2013 analysts were expecting that number to increase by roughly 20% to 1.333mm soda maker kits sold. In the United States, soda maker sales were expected to top 750,000 units. Now, as SodaStream indicated and what has been verified by NPD data reporting (subscription required) during the 4th quarter, soda maker kits average selling price (ASP) declined year-over-year. If SodaStream effectively discounted the average soda maker unit selling price by roughly $10 per unit, well, there goes the bulk of net profits in the quarter. At a discount of $10 per soda maker unit (either through gift cards, bundle kit inclusions or direct discounting) multiplied by 1.3mm soda maker units sold, roughly $13mm in net profits is gone just like that. If they sold even more than this, which is quite likely given the unfavorable product mix denoted in preliminary results during the quarter (Q4 represents largest number of soda maker kits sold which carry lower gross margins than syrup and CO2 sales), this discounting impact from soda maker kits could be even greater. Adding into the equation unfavorable currency exchange rates, logistical cost increases, raw material cost increases and possible market disruptions (Japanese market), the impact of small numbers can be quite meaningful. See what $10 can do?
What is of greatest importance for the long term success of SodaStream is to increase its user base and its brand recognition. The company clearly felt that with a weakened consumer environment during the 4th quarter, discounting soda maker kits was the right way to increase its user base and grow its brand. Having achieved a record setting sales quarter for the company in light of discounting, one would have to say they achieved their desired goal. With that said, unfortunately, SodaStream's revenue success came at the expense of shareholder equity presently.
Japanese Market
Earlier in this SodaStream analytical piece we denoted that there was possibly some market disruption in SodaStream's Japanese market. While we can't confirm any disruption concretely, what we can say is that SodaStream has experienced headwinds in this market through much of 2013 which resulted in the stoppage of shipments early in FY13. The Japanese market requires each SodaStream retail store to be certified with respect to the CO2 exchange process; not each retailer, but each retail store. This has created unexpected delays in the CO2 exchange distribution growth in Japan as well as growth in sales for the region. Additionally, SodaStream's distribution partner in Japan has not been exhibiting the expected product support for the firm which may lead to SodaStream acquiring the distribution rights in the near to mid-term. We believe this action may be "in the cards" because the company has hired a Market Director and Sales Manager for Japan recently and is putting in place a Financial Controller and Operations Manager shortly. While these issues may increase costs over the next few quarters, they should provide SodaStream with greater net profitability over the long term.
SodaStream, The Brand
SodaStream's brand recognition continues to grow with each passing quarter. Effectively managing that growth alongside rising shareholder expectations can be a challenge for any firm. With that in mind, SodaStream recently signed Scarlett Johansson as its Global Brand Ambassador. The news of Scarlett Johansson joining SodaStream was met with critical review and delight all at the same time and with respect to differing viewpoints. In the past, Johansson had been a proud supporter of the humanitarian efforts group Oxfam. The group did not take kindly to Johansson's decision to join SodaStream as the group boycotts any involvement with companies occupying and selling products manufactured in the "West Bank" territory. Under the microscope of sharp criticism from Oxfam, Johansson respectfully decided to end her ambassador role with Oxfam after eight years.
While the media had a "field day" with the announcement of Johansson joining SodaStream, sales of SodaStream products were impacted greatly over the first couple of weeks from the date the partnership was announced. On amazon.com, the Jet soda maker kit rose roughly 200 spots to its highest point of #35 in the top 100 items under the Kitchen and Dining category before selling out of several key SodaStream products.
With Scarlett Johansson, rated sexiest woman alive in 2013 by Esquire Magazine, as the company's Global Brand Ambassador SodaStream embarked on its 2nd consecutive Super Bowl Commercial campaign. The commercial was rejected initially due to its poking fun at Coke and Pepsi, but just like the last commercial it was revised, accepted by the CBS network and aired accordingly during the 4th quarter of the Super Bowl.
SodaStream's next big branding exercise will come when the company participates at the International Home and Housewares Show in Chicago, Illinois. The show begins March 15th and ends on March 18th.
Increased Category Competition
SodaStream is the leading company in the home carbonation category and has grown the recognition of the category over the last several years. Since bringing the product category to the United States in 2010, the company has successfully competed with other product manufacturers such as Cuisinart, Esio, Hamilton Beach, Primo Water Corp. (PRMW) and a host of other companies competing on a global scale. In 2013, Cuisinart's Sparkling Beverage Maker system lost 70% of its distribution as Bed Bath and Beyond (BBBY) discontinued sales of the product line at over 1,000 stores. Esio's beverage system lost 100% of its distribution as Wal-Mart (WMT) discontinued sales of the system in the first half of 2013.
Where there are failures in an increasingly popular product category there will always be newcomers. Bublimo is the newest competition for SodaStream in the Czech Republic.
In the United States, Bevyz is expected to begin sales of its latest hot, cold and carbonating machine during the year. Sparkling Drink Systems (SDS) is also expected to launch a single-serve soda maker in the United States ahead of Green Mountain's forecasted launch of its single-serve cold beverage system this year. SDS will be launching a breakthrough range of 6 products beginning in the second half of 2014 as announced by SDS-IC's Executive Chairman Serge Bueno at a recent beverage conference.
Competition in the home carbonation category is undoubtedly heating up. The newest partnership between Coca-Cola (KO) and Green Mountain Coffee Roasters will weigh on SodaStream until the birth of sales for the Keurig Cold platform is more recognizable to investors. In light of the KO/GMCR partnership, greater speculation over SodaStream's future partnerships has begun to creep into the picture. Many investors and analysts are of the opinion that SodaStream will team up with the likes of PepsiCo (PEP). With PepsiCo's recognizable interest in the category and Coca-Cola's new partnership taking form, many are of the opinion that PepsiCo will dive into the home carbonation category to a greater degree than it already has. PepsiCo's existing partnership with Bevyz may or may not be the mass market partnership it desires although that remains to be discovered.
SodaStream's New Products
In 2014, SodaStream will launch several new products. The most important product launch on a mass market scale might very well be the Play soda maker. The Play will come in two different price points depicting the variation in models. One Play model will be stationary like all other soda makers while the other Play model, roughly $10 higher in price, will allow the consumer to play with colors and components to suit their respective tastes as indicated in the photograph below. Considered the "world's first mass-customizable kitchen appliance," the Play features six colors; customers can buy the machine in any of the colorways, and then mix and match the various components to align with their mood or aesthetic tastes.
SodaStream is always looking to expand its portfolio of products, including its bottles and flavors. Coming to North America soon will be Sparkling V8 flavors. Later in the year we will see the company launch flavors from its newly announced partnerships with Welch's and Skinny Girl. In parts of Europe, the company will launch Del Monte licensed flavors. Investors shouldn't be surprised to hear about additional partnerships going forward as more and more beverage producers look to the home carbonation category to generate sales.
SodaStream has been working toward its launch of a new syrup form factor which invites users to simply squeeze a dose of syrup flavoring into the soda bottle. The squeeze package will eliminate the need for measuring in accordance with existing flavor syrup bottles as they will produce a precise dosing with each squeeze.
What we believe investors are hoping to also see in FY14 is the advancement of more refrigerator partnerships and/or models in the market which utilize SodaStream's technology. Several appliance manufacturers are in the developmental stages of producing a refrigerator with the ability to not only carbonate water, but flavor the carbonated water all at the same time.
Distribution Gains
In 2014, SodaStream grew its distribution by roughly 11% with the addition of some 7,000 new points of sale. New distribution was established in markets such as the United States, Australia, Japan, Poland, United Kingdom, Spain, Singapore, Canada, France, Brazil, Chile and the Ukraine. The bulk of distribution gains came from the U.S. through new retail partnerships such as Kroger (KR), Office Depot (ODP), Tiger Direct, Bevmo!, Bealls, Alco (ALC), Kmart (SHLD), P.C. Richards and Son, BJ's Wholesale (BJ) and Bed Bath and Beyond's subsidiary stores, The Christmas Tree Shop.
The next stated objectives with regards to distribution gains for SodaStream will come as the company looks to expand into regions such as India and Mexico during 2014. With key personnel in position in India, sales may commence in the region shortly with Mexico to come later in the year.
Clarity For Investors
Given the rapidly evolving home carbonation category and the litany of increased competition in the marketplace going forward, investors will be seeking greater clarity on the future growth drivers for SodaStream. When the company disseminates its results on February 26th, investors will be looking at the balance sheet as well as looking forward to the company's conference call with analysts. Many issues will need explaining and a game plan to address these issues, before the company today and over the next 18 months, will need to be outlined.
SodaStream has embarked on some lofty objectives for the current year and its future success is dependent upon them achieving these objectives in a timely fashion. First, the company is fully engaged in building out its new manufacturing facility in Negev, Israel. This facility will effectively enable the company to greatly lower its operating costs and expand its gross margins through increased capacity utilization. Currently, SodaStream is forced to use third-party manufacturing firms in order to meet the demand for SodaStream products. Several firms are contracted in China which the company has a strong desire to eliminate by year's end.
There has been an ongoing dialogue between the Israeli government and SodaStream over the last several months regarding the promised grants assigned to SodaStream for the development of the new manufacturing facility. To date, the first part of the grant has been allocated to SodaStream, however, the remaining portion of the grant has been in dispute with both sides reaching out to the media. With this in mind, SodaStream has continued to build out the new facility and the company has stated it is on plan with its time lines. In a communication from SodaStream's Yonah Lloyd he states, "The facility is moving ahead as planned". What investors would like to know are how the talks between the Israeli government and SodaStream are advancing and what the worst case scenario is regarding the subject matter. If the government does not honor its commitment, how much more will the facility cost SodaStream in terms of dollars and time?
Moving forward in North America, investors would like to see a clear long term plan on how SodaStream aims to address competition in a weakened consumer environment. Given the recent downturn in consumer spending, retail sales and even the housing data, where does SodaStream see the opportunity to grow its sales and profitability for the foreseeable future? Does the company see growing partnerships, expanding products and innovation as viable answers to both competition and a weaker consumer environment? Usually these aspects of operations do bode well for delivering greater future results, but it is necessary for investors to hear the game plan for themselves.
A great deal of speculation is surrounding SodaStream and its desire or ability to garner a major beverage brand partnership like a PepsiCo or Dr. Pepper Snapple Group (DPS). What we understand, however, is that SodaStream has always been sensitive to the major beverage producers desire to have taste consistency in a partnership with SodaStream.
Distributor issues seem to pop-up every year for SodaStream. The company purchased the distribution rights in Italy during Q2. The issues related to Japan seemingly continue to plague the company's overall results and with key personnel from the company assigned to the region now, Japan could represent a new acquisition target going forward. Direct distribution yields greater profitability for the company and company officials have outlined their desire to gain a more favorable profit mix between direct distribution and distributor partners going forward.
Guidance, Partnerships and The Numbers
With 2013 in the rear view window and the first quarter of 2014 nearly 2/3 complete, investors are looking forward to hearing what SodaStream sees for full year sales and profits in 2014. Full year guidance will go a long way to cementing shareholder sentiment over the coming months. Net income guidance will not likely excite investors with the headwinds already introduced by management earlier in January, but the silver lining could be the drop in compensation related expenses which could provide a much needed boost to net income this year.
Investor sentiment is somewhat tied to the belief that SodaStream either needs or should partner with a major beverage producer and PepsiCo is in the spotlight since Coca-Cola has jumped into the home carbonation category with Green Mountain Coffee Roasters. It is probable, that should SodaStream not announce a partnership in similar fashion to Green Mountain's partnership announcement, shareholders could become further disenfranchised with SodaStream as a continual, long-term growth story.
In Q3 of 2013, SodaStream saw strong sales for both CO2 refills and soda maker kits, however, flavor sales fell short of expectations as they rose by only 8 percent year-over-year. In concluding this quarterly preview, let's take a closer look at what the company is up against regarding individual product sales metrics on a year-over-year basis.
Q4 2012 product unit sales:
- Soda maker units: 1.111mm
- CO2 Refill units: 4.3mm
- Flavor units: 7.4mm
Disclosure: I am long SODA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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