Will Hansen Natural's Gross Margins Increase or Decrease?

In the coming quarters Hansen Natural’s (HANS) gross margin (gross profit divided by net sales) could benefit from several developments, but there could be some pitfalls as well. On average, Hansen Natural sells a 16 oz. can for about $0.82 (net sales), at a cost of $0.40. In the four trailing quarters, Hansen Natural sold the equivalent of 1.24 bln 16 oz. cans of (mostly) Monster Energy, sodas, juices and teas. The chart below visualizes the development of proceeds and costs per can over the last 2.5 years, accompanied by a table, providing more detail.

 

Let’s look at some positives and potential negatives for Hansen’s gross margin mix.

Gross margin positives

• Commodity prices have succumbed to gravity lately, and are not likely to rebound soon, especially not to their recent highs. This should have a positive impact on Hansen’s input prices (e.g. aluminum, high-fructose corn syrup, milk, coffee, juice – see charts at the bottom of this post), depending on contract terms.
• Lower-margin Java Monster, while benefitting from lower input prices itself (but still at below average gross margin), will play a smaller role in the whole product mix, as higher margin Monster Energy (Regular and Lo-Carb) will be distributed in European markets, starting Q4.
• Monster Hitman, though probably not a big contributor in absolute terms, is expected to have above average margins; derived from the main Monster drink, coming in a smaller quantity, Hitman currently sells for $2.30 on Ebay. Hitman will at least mitigate some of the lower margin on Java.
• The price increase on Regular Monster 16 oz. of 6% and on Monster Java of 12%-13% in the beginning of the year, could still have a positive effect in the current quarters. Gross sale price (before promotional allowances) per can  was $0.90 in Q4 2007 (before the price increase), $0.91 in Q1 2008 (not much impact, because resllers built up extra inventory at old prices) and $0.94 in Q2 2008 (+4.4% compared to Q4 2007).

Gross margin negatives

• The difference between gross sales and net sales are the “promotional allowances”, expenses made by Hansen Natural to provide retailers with displays, coolers, discount promotions. As Monster is entering new markets, through its recent deal with Coca Cola Enterprises (CCE), promotional allowances could go up, without off-setting sales (at least in the beginning). This could potentially put some temporary pressure on gross margin.
• At what price point Monster will be sold in Europe is still to be seen. At current FX rates, an 8 oz. Red Bull sells in grocery for about $1.60 in the Netherlands; Monster 16. oz  should come at a similar price point if it sticks to its US pricing strategy vs. Red Bull. In the end it all depends on how Hansen Natural, Coca Cola Enterprises and the retailers divide the margin and what mark-up satisfies all parties.

The gross margin negatives are either of a temporary nature or largely unknown. The positives have more substance and staying power, resulting in a net positive outlook for gross margin. Note that with a 38% tax rate, each 1% increase in gross margin adds 0.62% to net margin. As a reminder,  talking about margins only make sense if they’re backed by solid absolute dollar sales (or euros, or pound sterling…).

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Commodity Charts (from barchart.com)

 

 

 

 

 

Disclosure: Long HANS.