In the immortal words of Phil Rizzuto, "Holy cow"! No better way to describe SodaStream's (SODA) Q4 2012 earning and revenue results. So let's take a look at the results and the company's FY13 guidance before diving into some minutia, which will prove to paint the picture investors could expect to see for FY13.
For the fourth quarter ended December 31, 2012:
- Total revenue increased 55.2% to $132.9 million from $85.7 million in the fourth quarter 2011.
- Net income increased 41.6% to $7.5 million compared to $5.3 million a year ago, and Adjusted net income was $9.4 million compared to $6.7 million in the prior year.
- Diluted earnings per share increased 38.5% to $0.36, compared to $0.26 in the fourth quarter 2011 and Adjusted diluted earnings per share were $0.45 compared to $0.32 in the prior year.
For the year ended December 31, 2012:
- Total revenue increased 51.0% to $436.3 million from $289.0 million in 2011.
- Net income increased 59.6% to $43.9 million compared to $27.5 million a year ago, and Adjusted net income was $50.0 million compared to $32.9 million in the prior year.
- Diluted earnings per share increased 56.0% to $2.09, compared to $1.34 in 2011 and Adjusted diluted earnings per share were $2.39 compared to $1.60 in the prior year.
Full Year 2013 Guidance:
- The company expects full-year 2013 revenue to increase approximately 25% over 2012 revenue of $436.3 million.
- The company expects full-year 2013 Adjusted EBITDA to increase approximately 34% over 2012 Adjusted EBITDA of $61.1 million.
- The company expects full-year 2013 net income on an Adjusted basis, which excludes share-based compensation expense, to increase approximately 25% over the Adjusted net income of $50.0 million reported in 2012.
- The company expects full year 2013 net income to increase approximately 18% as compared with its net income of $43.9 million in 2012. 2013 guidance includes:
- An effective tax rate of approximately 10% compared with an effective tax rate of 1.7% in 2012.
- Share-based compensation expense of approximately $11.0 million compared to share-based compensation expense of $6.2 million in 2012. The increase is primarily related to the recent adoption of the Company's long-term incentive plan.
Upon reporting another record-setting quarter, shares of Sodastream International, Ltd. sold off in much the same way shares of Green Mountain Coffee Roasters (GMCR) sold off when it reported earnings recently. If I hadn't mentioned it before, although I'm sure I have, these two companies generally trade in lock-step through their p/e multiples. Many hedge funds, which own SODA also own GMCR and they trade the two stocks in tandem. The reason I am emphasizing this now is that the price-to-earnings multiples for the two stocks have slid away from each other recently and I felt they were due to come together once again. SODA lost share value on February 20, 2013, while GMCR benefitted; and the two stocks are nearing similar p/e multiples once again. Additionally, if one takes a peek at GMCR's Q4 2012 earnings release and subsequent share price appreciation and then looks at the share price appreciation of SODA one will see that again they traded together similarly and accordingly.
With SODA selling off the way it did and normally does after reporting stellar earnings results and even guiding above analysts' estimates, the stock is now in the "show me" category once again. Having shown top and bottom line growth above 50% for 2012 and guiding lower than this performance for FY13, investors are wondering if the ride is over. The answer is very clearly no, but we'll let the company's results speak for themselves during 2013. SODA is entering a more mature phase of its business cycle, but it is still a growth company with plenty of strong years of top and bottom line growth ahead.
Here are some key takeaways from the earnings results as we viewed them at Capital Ladder Advisory Group:
- FY13 gross margins expectation of 54% which is flat YOY due to third-party production and shipping costs. On the surface this seems like a negative development, but under the hood, the cause is demand growth outstripping capacity utilization under the current wholly owned manufacturing by SodaStream International.
- A&P expense will come down YOY although only 1%. SodaStream will dedicate more advertising dollars toward television as opposed to in-store demonstrations in FY13.
- Capital Expenditures in FY13 are expected to be $78-$80 million. Some 60% of this total is dedicated to the company's new manufacturing facility in Israel (New factory is not in the disputed territory).
- The company will see a tax rate increase in FY13 and expects the rate to be around 10% during the year.
- United States household penetration rate, including sell-out, which occurred during Q4 2012, is estimated to be above 1% based on the most recent data.
- Q4 2012 sales per door growth was roughly 20%, indicating increased brand awareness and strength of sales beyond pipeline building efforts.
- According to NPD, in Q4 2012 sell-out of soda maker sales grew 300%, flavor sales grew 140% and CO2 sales grew 290% respectively (NPD data does not include all sales channels).
As indicated in the past, SodaStream will be entering a new phase of its business cycle after building the vast majority of its mass market distribution pipeline over the last several years. This new phase of the respective business cycle is typically focused on the consumer and increasing the consumer adoption and usage rates. As identified during Q4 2012, even without significant pipeline builds, the company can grow its user base and consumption rates in existing doors. SodaStream plans to grow its user base with existing retail partners through carefully constructed advertising and promotion, demand forecasting that provides appropriate product placement, continued innovation and expanding its shelf space.
Moreover, even though SodaStream is entering this new phase of growth, marked by a moderation of the growth in sales expectations for FY13, this does not suggest the company will not continue to expand its distribution network. The company plans to expand into several new markets this year such as Mexico, India, Argentina and if all goes well in Chile, which early indication suggests is doing quite well. The company could further expand into Peru during 2013. The following links suggests that Q4 2012 produced strong results in Chile for SodaStream and that the company has a goal of 10% market share over a five-year period in the nation:
Russia is a growing market and in 2011 the region showed the fastest rate of growth in the small appliance category in Eastern Europe.SodaStream's new distribution partnership should bare fruits for the company this year. By the way, this new distribution partnership is not necessarily baked into full-year guidance by our estimates and could help in aiding some upside surprises for revenue during the fiscal year.
As the company expands into new markets, it will also focus on expanding in existing markets on a selective basis. In some markets, the company will look to further explore the DIY and home shopping distribution channels. SodaStream has an existing partnership with QVC Germany and we would expect the company to expand this distribution partnership here in the U.S. during the year. In the United States, SodaStream sells its products in select DIY retail locations already.
SodaStream will also be further exploring the drug and grocery chain retailers in specific markets during FY13. Capital Ladder Advisory Group forecasts for at least one of the major drug store chains such as Walgreens (WAG), CVS or Rite-Aid (RAD) to begin CO2 sales during FY13 in the United States while we also expect a major European chain to do the same.
Now let's put the deal with Samsung (SSNLF.PK) into perspective. This deal first and foremost serves to display the spectrum of innovation, which the SodaStream system offers. The new Samsung 4-door refrigerator with built-in soda maker will bookend the product portfolio of SodaStream products as the company looks to seek out consumers across multiple channels and in multiple economic demographics. Within this new co-branding deal lies the opportunity for SodaStream to explore new channels of distribution. Samsung refrigerators at the high and low end are sold at Home Depot (HD) Lowe's (LOW), Sears (SHLD) and a host of other do-it-yourself (DIY) retailers. With SodaStream's new distribution partnership at homedepot.com, it is entirely probable that investors could see a roll-out of the CO2 exchange program at Home Depot during FY13. If these retailers offer the Samsung 4-door, carbonating refrigerator, it is likely that they will need to offer a one-stop shop for the consumer who wishes to purchase the refrigerator. To put it plainly, that just makes good business sense. If I'm Home Depot or Sears and I'm offering this carbonating refrigerator, I wouldn't want to send my customer elsewhere to buy the CO2 refill. With all that said, don't expect a meaningful contribution to the top or bottom line from this new product offering as such durable goods can take a great deal of time to gain consumer adoption.
The AquaBar and Breville/SodaStream joint soda maker machine will add to the product category in 2013 and these two newly innovative product launches couldn't come at a better time. Additionally,SodaStream is revamping the Crystal soda maker and launching the new variant in Germany this spring.
With regards to product launches, Capital Ladder Advisory Group also identifies the opportunity for SodaStream to expand its current co-branding deals with Kraft Foods (KRFT) and Campbell's (CPB) during the year. Given the strength of the Kool-Aid flavored syrup launch during Q4 2012, we could expect SodaStream to add to this portfolio of Kraft flavors with Mio flavors and/or CapriSun flavored syrups during the fiscal year.
As it pertains to the competition that we see this year for SodaStream, the picture will be clearer in the coming months. However, we do have an update with regards to Cuisinart (owned by private company Conair) and its distribution reach for its respective soda maker product line. The company has expanded distribution to include Bloomingdales, casa.com and fixtureuniverse.com most recently (fixtureuniverse.com is a Lowe's company). Sales of the Cuisinart continued to weaken post holiday season and we hope to see some pick-up in sales in order to bring consumer awareness to the product category. Currently, SodaStream is doing the majority of the heavy lifting when it comes to promoting the category.
Esio (private company; CEO Frank Leonesio) is another competitor in the United States although it doesn't currently function as a soda maker, but rather as a hot and cold water beverage maker. SodaStream is carefully watching this recently launched product, which can be purchased at Wal-Mart (WMT). The Esio machine could be an interesting development for SodaStream, possibly a partnership even. Frank Leonesio recently discussed that the company is backed with $10 million by an Israeli partner, but wouldn't name the partner. Much like SodaStream, Esio is looking to make a plumbed-in waterbar part of the consumer s kitchen in the not-too-distant future.
The barriers to entry are extremely high in this product category as the CO2 distribution network already fashioned by SodaStream has created a wide moat for the company. With this in mind, we can easily foresee additional appliance makers partnering with SodaStream this year and we name those players in our full report at capitalladders.com.
SodaStream will be participating at the International Home and Housewares show the first week of March. The company will showcase the Source, SodaCaps and a host of products at the show. Many deals are inked at the IHH Show and have been in the past.
Below is a list of newly initiated institutional positions in SODA during Q4 2012, some of which still maintain a position in SODA. There's not too many new positions, which was an indicator of the post earnings release directional movement of the stock for some: Cupps Capital Management LLC, AZL Allianz AGIC Opportunity (ALIZF.PK), AXA (AXAHF.PK) Multimanager Small Cap Growth B, Grandeur Peak Intl Opportunities, Whale Rock Capital Management LLC, Symmetry Peak Management LLC, MapleLane Capital LLC, Susquehana International Group LLP. Yes, some of these funds instituted short positions. Based on the historical movement, light new institutional participation during Q4 2012 and high expectations placed on SODA's Q4 2012 earnings results, I took the following stance with regards to my recent trade in SODA. Additionally, I viewed the post-earnings release as a new investment opportunity, which can be viewed through my share disclosure.
Disclosure: I am long SODA.