SodaStream International Ltd. (SODA) will be reporting Q4 2012 earnings on February 20, 2013. Shares of SODA have benefited greatly from increased press coverage, retail partner holiday circular promotions and sell-outs in stores throughout the holiday season. SodaStream was also featured on the cover of Parade. Additionally, SodaStream was named to Fast Company "Top 50 Innovative Companies" on February 12. With all of this attention and spotlight on SodaStream over the last two months, shares of SODA have risen some 55%, reaching a 52-week high of $53.99 on January 25, 2013.
The analyst community has come out in full force, favoring shares of SODA since the turn of the calendar year. Both Barclays and Citigroup recently initiated coverage of the stock with a buy rating and respective $55 and $60 price targets. Both firms gave shares of SODA a forward looking multiple greater than 20 times the current analysts' estimates for earnings in 2013. Oppenheimer and Stifel Nicolaus also came out with strong buy recommendations and increased their respective estimates for Q4 2012 and Q1 2013. With all of this increased analyst coverage and increased analysts' expectations on the company, many investors are eagerly awaiting the release of Q4 2012 earnings and the subsequent Earnings Conference Call.
It's no secret by now that sales of SodaStream products at retailers saw heavily increased demand YOY through the holiday shopping season. Capital Ladder Advisory Group channel checks have been at the forefront of getting the sales data out to hedge funds throughout Q4 2012. Within our full Q4 2012 report, available at capitalladders.com, we have offered the investment community a peek at two of the channel checks we supplied our clients with most recently.
Q4 2011 Results:
- Revenues increased 32% to Euro 66.1 million
- Americas revenues increased 70% to Euro 24.6 million
- Adjusted diluted earnings per share was Euro 0.25 or $0.32*
- Unit sales of soda makers increased 8% to 767,000
- Unit sales of flavors increased 24% to 4.6 million
- Unit sales of CO2 refills increased 27% to 3.4 million
- Revenue of $121.03 million - high estimate of $130 million
- Earnings of $.39 a share - high estimate of $.45 a share
- FY13 revenue guidance of $508 million, up 19.7% YOY
- FY13 earnings guidance of $2.74 a share
Moving forward with our quarterly preview, we want to get right into operational achievements which occurred during Q4 2012. Expansion efforts continued throughout the quarter as SodaStream reached more distribution deals including a launch at Wegmans, Fred Meyer, Haggan and Sam's Club in the United States. In Japan, SodaStream added even more retail doors to bring its total door count close to 600 in the island nation. In Brazil, SodaStream also grew its doors as Q4 represented the first holiday season for consumers in the nation to buy SodaStream products as gifts for friends and family. Remember, SodaStream products did not hit retail shelves in Brazil until late Q1 2012. As noted in prior reports, SodaStream also expanded its online presence through walmart.com, samsclub.com, homedepot.com, nova.com (largest Brazilian online retailer and second largest online retailer in South America) and qvc.com during the quarter which also helped to boost sales for the company YOY. While it is hard to quantify the contribution from online sales, Amazon.com's (AMZN) average sales ranking for the SodaStream Jet soda maker was in the top 25 throughout the month of December 2012.
In Q4 2012, SodaStream effectively expanded its presence in South America and Asia through Chile and Singapore, respectively. Analyzing the retail partners in these two regions, we feel comfortable in saying that SodaStream added some 500+ doors in the two regions. As we peek into the current quarter, SodaStream will see its presence in Russia greatly enhanced through its newer distribution deal reached in October 2012 with Bureaucrat (bureaucrat.com). SodaStream will launch nationwide in Russia at Media Mart in Q1 2013.
The YOY expansion efforts employed by SodaStream have resulted in an increase of roughly 20,000 doors which should serve to effectively increase sales, earnings and ultimately brand awareness. Total retail distribution of SodaStream products is roughly 60,000 doors across 45 nations.
In addition to expansion efforts, the company continues to roll out its CO2 exchange process to retailers. In the second half of 2012, both Kohl's (KSS) and Target (TGT) began implementing the CO2 exchange program and we see that the tests are going well. In January of 2013, Target rolled out the gas exchange process to all 1,700+ store locations. Additionally, Best Buy (BBY) began testing the CO2 exchange program during the month of January in South Florida store locations. Staples (SPLS) and Kitchen Collection began selling the 130L CO2 refills in Q4 2012. SodaStream has indicated that it plans to roll out the larger sized CO2 exchange to more retailers in 2013 as its consumer base grows and the company looks to grow revenues further. SodaStream has over 11,000 points of CO2 exchange in North America.
The Q4 advanced distribution deal to sell products in Sam's Club locations offers SodaStream the opportunity to expand its CO2 exchange program if Sam's Club or Costco (COST) chooses to participate in the CO2 exchange program to seek a competitive advantage. Speaking of Costco, I would fully expect to see SodaStream expand its current distribution deal with the company to include roughly 80 Costco Canada stores later this year. These are just a few examples of the company managing its growth YOY by adding products and shelf space in existing doors and with existing retail distribution partners.
When it comes to expansion, there is a piece of the puzzle being missed by the analyst community which is currently looking for the company to grow revenues by less than 20% in 2013. While I would tend to agree that it is highly unlikely the company will grow the top-line by 50% again this year, we at Capital Ladder remain ahead of the Street with our revenue projections. So what is being missed you might ask?
While the company will expand into India, Mexico, China and Greece in 2013, and possibly Argentina and Poland, analysts are not modeling existing co-branding deals such as the one with Breville Ltd which was formed last year and will likely produce a new soda maker to be mass distributed later this year. Details regarding this deal and distribution possibilities is notated in our full quarterly report. The partnership between Breville and SodaStream will represent a soda maker developed by both companies and powered by SodaStream's CO2. It is important to note that Breville has retail distribution partners in many areas where SodaStream has not been able to achieve distribution to date.
There has yet to be presented a single analyst report pointing toward the Breville product launch offering revenues for SodaStream in 2013 and Capital Ladder feels this has been discounted from the SodaStream revenue estimates by participating analysts for FY13. Utilizing sales data from the recent Cuisinart soda maker launch, one can deduce that there are certain revenue contributions to be seen in 2013.
With regards to Cuisinart and the product placement side-by-side SodaStream at Bed Bath & Beyond (BBBY), SodaStream continues to see strengthened sales while Cuisinart products have limited if any impact on the SodaStream business. Additionally, we are seeing a high rate of returns for the Cuisinart product exiting the holiday season.
Flavored Syrups and Machines:
In 2013, SodaStream will also look to grow the product category by adding new flavored syrups such as Campbell's (CPB) V8 flavors alongside the soon to be released Sodacaps. We fully expect SodaStream to launch additional flavors and licensed flavors during 2013 as the company continues to enhance its business moat. New co-branding partners will also enhance the flavored syrup line of products in 2013.
Most recently in Q1 2013, SodaStream launched its new and improved diet cola, root bear and other diet flavors which now have zero sodium content. Additionally, Best Buy has begun selling Kool-Aid flavored syrups during the quarter. The family of diet flavored syrups should also see greater sales in 2013 with the roll-out of Stevia sweetened flavored syrups which are highly anticipated.
Germany is a thriving SodaStream nation and as such the company continues to provide a growing assortment of flavors for Germans to consume. In Q1 the company will launch two new flavors in the country, pink grapefruit and lemon unfiltered. Moreover, SodaCaps will be available in the United States in the coming months. Already, SodaStream has offered the American consumer a sampling of the SodaCap via the new Source machine kit which comes with a SodaCap sampler at participating retailers in the United States.
The Source soda maker made its debut at Bed Bath & Beyond in October 2012 and adds to the soda maker product line-up by further advancing the product category. Most recently, Target, Williams-Sonoma (WSM) and Best Buy initiated sales of the Source machine in stores. It is important to understand that with the broad range of products offered by SodaStream, retailers do not have to compete head-to-head for a singular product.
AquaBar and Demand:
We expect SodaStream to announce new products in 2013. The AquaBar will debut in Europe and Israel during the second half of 2013. The AquaBar is a plumbed-in, on-demand soda machine with the functionality to filter, heat, cool and carbonate water. SodaStream announced its dedication of roughly $4 million of brand development in Israel recently and we believe that some of this is related to the launch of the AquaBar this year. "Water bars" are the norm in Israel and many European countries. But there is even more to the "water bar" story than meets the eye. SodaStream better get a move on this product line as we are keenly aware of product launches and the competition right in their own backyard as well as in India where SodaStream is heading.
With SodaStream's business and sales growing at a faster pace than many have anticipated, even by management's own expectations, the company is putting plans in place to ensure the proper analysis of demand in particular markets. Most notably, the company is expanding its management base in the United States as sales in the U.S. have climbed considerably during FY12. The company is hiring for Sales Managers on the East and West coasts of the United States as well as a Demand Planner and Forecast Analyst for the North American region. The increase in management personnel in North America proves to show that corporate officers understand the need for greater demand planning and forecasting for what could serve to be the highest sales volume region going forward for SodaStream.
Speaking of demand, the company continues to drive demand through promotions and marketing efforts which serve to further increase brand awareness and product knowledge. SodaStream participated in over 30,000 in-store demonstrations last year alone. The recent Super Bowl commercial has resulted in the desired effect the company expected which was advanced orders for its newest Source soda maker.
As noted earlier in this quarterly preview, analysts are projecting less than 20% revenue growth and roughly 29% earnings growth in FY13 for SodaStream. Stifel Nicolaus believes revenue growth will be even lower and projects SodaStream to grow revenues by only 11% in FY13. While many of you already know I feel Stifel Nicolaus grossly under analyzes the company's operations, user base and scope of distribution attributes, it should be noted that a more modest growth rate will ensue in 2013. Understanding the pipeline builds which occurred in 2012 serves to better formulate the possibilities for revenue growth in 2013. SodaStream grew its retail distribution by roughly 50% in 2012 and, by our assessment, will not come close to this distribution growth in 2013. It is notable that the growing user base and increased consumption of consumables will help to model revenue growth in the range of 25-35% for FY13, but much more than that becomes extremely difficult to model toward and for the company to realize by our estimates, channel checks, and understanding of current and existing distribution expansion efforts.
Investors should also take note that product placement at Wal-Mart (WMT) is likely to change in the Spring of 2013. Wal-Mart has dedicated end-cap space for SodaStream products through April 2013, but not thereafter. We will monitor the impact on sales post Wal-Mart end-cap to see what the impact is at that time. With increased brand awareness through SodaStream's continued efforts and consumer word of mouth, the shelf reassignment could be mitigated, but it should be considered.
In a recent Seeking Alpha article authored by Mr. Galileo Russell, the author says:
"Apparently analysts aren't pricing in any of this Super Bowl saga, which has brought Sodastream so much positive attention. Estimates for the March quarter have barely changed in the past 90 days, and thus are a weak reflection of the rapidly evolving Sodastream story. Multiple online metrics (see above) indicate Sodastream received a huge promotional boost from its 'failed' Super Bowl campaign, which could translate into higher sales early in Q1. For this reason I believe we will see Sodastream project guidance above current analyst estimates."
First and foremost, Stifel Nicholaus, Oppenheimer and other analysts have changed their respective forecasts for Q1 2013 and some for the full year earnings and revenue estimates. Secondly, the analysts have a much greater understanding of the rate of sales and distribution matrix which offer the analysts a better viewpoint into the business, thus offering the analysts better ability to forecast estimates. While Capital Ladder Advisory Group maintains that the majority of analysts haven't grasped the full scope of possibilities for SodaStream in 2013, all recent reports offered by the analysts covering SodaStream denote clearly the impact from the Super Bowl alongside the benefits from the appreciated Euro YOY, conflicting with what Mr. Russel has suggested in his respective article.
SodaStream is preparing to announce the company's partnership and the move to produce flavored syrups in the United States with this newfound partner. This operational development will serve to increase margins in the future as the company will see a decrease in goods shipped to the United States. This development will also ensure faster delivery times from truck to shelf and decrease in-store stock outages.
With margins in mind, one should expect margin contraction in the most recently ended quarter due to the greater mix of soda machine sales vs. consumables and the use of third party production. However, this contraction should be short lived. Also, the company should show free cash flow for Q4 2012. Moreover, investors should expect a decline in options expense for FY13. There is a lot more than meets the eye here. SODA investors and our full scale report hits at the finer points related to competition, expansion efforts, possible new partnerships, real time channel checks and near-term announcements.
SodaStream will be participating in the International Home and Housewares Show again this year. Last year the company unveiled Jillian Michaels as a spokesperson for SodaStream at the Chicago Show. The company will feature the Source machine alongside SodaCaps and other products for retailers to touch, taste and ultimately place orders. In the last two years, SodaStream inked deals with both Target and Wal-Mart at the International Home and Housewares Show just to name a few big retailers.