SodaStream Q2 Earnings Trump Estimates, U.S. Remains Weak

Zacks

Shares of SodaStream International Ltd. (SODA) surged 10% after it announced better-than-expected second quarter 2014 results.

In-fact, shares of SodaStream have been going strong since last week on the news that it plans to divest itself for $40 per share to a private buyer. The market seems to have overlooked the fact that the company lowered its outlook for the year.

Adjusted earnings of 43 cents per share beat the Zacks Consensus Estimate of 32 cents by 34.4%, which we believe was due to strong international performance.

Earnings of the Israel-based manufacturer of household soda machines, however, declined around 28.3% year over year due to soft U.S. sales, currency headwinds, and weak margin.

Revenues

In line with the company’s expectation of a mid-single digit increase, total revenue of $141.2 million increased 6.6% year over year and surpassed the Zacks Consensus Estimate of $140 million as robust international sales were offset by challenges in the U.S.

Geographically, revenues decreased 14% in the Americas but increased 14% in Western Europe, 13% in Asia/Pacific and 71% in Central and Eastern Europe, Middle East and Africa (:CEMEA).

Sales were weak in the Americas due to elevated inventory levels at retail customers due to weak holiday sellout in December. Also, efforts to create demand were not very effective. Even the launch of hotspots in about 1,500 Wal-Mart Stores Inc. (WMT) stores during the quarter did not have the desired effect on demand.

Management is looking to reinvigorate the U.S. business with a focus on reaccelerating the soda maker’s growth by improving marketing execution and increasing retail presence.

The solid performance in Western Europe was driven by strong gains in several markets, like Germany and Finland. In Asia Pacific, Australia continued to exhibit strong gains. Improvement in the Czech Republic and strong performance in new markets like Poland led to the improvement in the CEMEA region.

Among the product categories, while soda maker sales declined around 8%, consumables (like gas refills and flavors) increased 15% and other product sales increased 27%.

Margins

Gross margins declined 380 basis points (bps) year over year and 180 bps sequentially to 50.5%. An unfavorable product mix due to increased share of lower margin soda makers, inventory write offs and currency headwinds hurt gross margin performance.

The sales and marketing (S&M) expense ratio increased 30 bps in the quarter to 33.3% due to higher selling expenses. Higher selling expenses are related to the recently acquired Italian and Japanese distribution channels.

General and administrative expense ratio declined 100 bps in the quarter to 9.3% of revenues due to decline in share-based compensation expenses.

Adjusted operating margin declined 310 bps year over year to 8% due to weak gross margins and higher costs.

2014 Outlook

Management updated the previously provided financial guidance for 2014 and kept the outlook conservative.

Full-year 2014 revenues are expected to increase about 5%, compared to the prior guidance of approximately 15% over 2013 revenues of $562.7 million.

The company expects Americas to decline in the low teen range, while the other three regions are expected to increase in the mid teen range.  

Gross margin is still expected to be approximately 51%, flat with 2013 levels.

Owing to a decline in revenue projection, 2014 EBITDA is expected to increase approximately 5% year over year, down from the prior expectation of about 11. Excluding currency headwinds, EBITDA is likely to grow 17%, lower than than prior guidance of 25% increase.

Full-year 2014 net income is expected to decrease approximately 5% year over year, worse than the prior guidance of about 3% decline.

SodaStream carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Better-ranked stocks in the consumer goods industry include The WhiteWave Foods Company (WWAV) and Cott Corporation (COT). Both companies carry a Zacks Rank #2 (Buy).

Read the Full Research Report on SODA
Read the Full Research Report on WWAV
Read the Full Research Report on WMT
Read the Full Research Report on COT


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