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SodaStream Earnings In-Line, Fx Hits Sales; Repositioning On

Zacks Equity Research

SodaStream International Ltd. SODA reported adjusted earnings (excluding restructuring costs) of 22 cents per share in the third quarter of 2015 which were in-line with the Zacks Consensus Estimate. Earnings, however, plunged 51% year over year due to lower sales and margins.

Adjusted earnings of the Israel-based manufacturer of household soda machines exclude restructuring costs related to the growth plan. Including the costs, earnings came in at 11 cents, much less than 45 cents a year ago.


Sodastream Intl (SODA) - Earnings Surprise | FindTheCompany

Revenues Discussion

Total revenue was $110.0 million which missed the Zacks Consensus Estimate of $114 million by 3.5% and declined 13% year over year. Currency headwinds, due to the weakening of many foreign currencies such as euro, Australian dollar and Swedish krona against the U.S. dollar, had a negative impact of around $16 million on sales.

Excluding the impact of currency, sales remained flat year over year as lower sales in the Americas and Asia-Pacific offset better constant currency sales growth in Western Europe. The constant currency sales growth improved from the last quarter as SodaStream’s repositioning efforts gained traction.

The Zacks Rank #3 (Hold) company has been facing soft sales in the U.S. over the past few quarters due to low demand for its products — soda/sparkling water machines and flavored syrups. SodaStream’s products are primarily sold at major retail stores like Kohl’s, Corp. KSS, Macy’s, Inc. M and Bed Bath & Beyond, Inc. BBBY.

The U.S. carbonated soft drink (CSD) market is facing troubles as consumers are shifting away from traditional soda toward more natural, water-based beverages with fewer calories.

SodaStream is thus pursuing a global restructuring and growth plan. It is repositioning itself as a water brand under a health and wellness plan and making significant changes in its growth strategies to turn around the business.

As part of the plan, the company rolled out a range of natural water-enhanced flavors in the U.S. and some international markets in the third quarter. The company is also supporting the launch with marketing campaigns and improved retail execution.

Management said that the new flavors were generating decent sell through at the retailers in the U.S. where they have been on shelf for more than a month.

Also, the company is working to transform its manufacturing base and operating structure — including consolidating production under the new Lehavim facility in Southern Israel — to enhance efficiency.

SodaStream’s Americas’ revenues, which comprise 23% of its global sales, went down 11% due to lower sales in the U.S.

U.S. sales declined in a low single-digit range due to the ongoing transition and exit of certain retail doors earlier this year. In addition, lower advertising support hurt sales.

Sales declined 8% in Western Europe, which comprise around 63% of global sales, due to currency headwinds. Excluding currency headwinds, sales were up 9% led by double-digit growth in Germany, Switzerland and Austria, Italy and Belgium which made up for the decline in France.

In Asia-Pacific, revenues decreased 32% due to currency headwinds and soft performance in Korea and Australia which offset higher sales in Japan. Finally, in Central & Eastern Europe, Middle East, Africa (CCEMA), sales plunged 27%.

Volumes of sparkling water maker starter kits fell 22% year over year, while flavor units plunged 12%. Carbon dioxide (CO2) refill sales, however, rose 10%, an all-time high.

Margins Weak

Gross margins declined 280 basis points (bps) year over year and 390 bps sequentially to 48.4%. This was because a favorable product mix, driven by higher proportion of CO2 refills, was offset by currency headwinds. Currency had a 250 bps negative impact on gross margins.

However, operating margins declined 220 bps to 4.9% mainly as lower marketing and operating costs were offset by lower revenues and currency headwinds. Negative currency impact hurt third-quarter operating income by $5.1 million.

Fourth-Quarter Outlook

With new flavors on the shelf and the Lehavim production facility now fully functional, management is optimistic of achieving better sales trends in the fourth quarter and 2016.

Management expects fourth-quarter sales to be flat sequentially and turn positive in 2016.

Gross margins are projected to decline less than 100 bps in the fourth quarter due to unfavorable mix and currency headwinds. Moreover, marketing costs are expected to be slightly higher, while operating profit will be marginally low, both on a sequential basis.

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