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After a highly contentious and controversial Q4 2012, Monster Beverage Corp. (MNST) released its highly anticipated Q4 2012 earnings results after the bell yesterday. Upon the release, which showed another miss on the top and bottom line from the company, shares fell some 7% in the after hours trading session before rebounding and finishing higher in after hours.

Let's first take a look at what the company reported for Q4 2012:

  • Net sales of $471.5 million, up 15% vs. a year ago
  • Diluted earnings per share of $0.39 a share vs. $0.35 last year
  • Gross sales in October 2011 grew 31.1% YOY
  • Gross sales outside of the US were $115.2 million vs. $88.9 million a year ago
  • Gross profit margin was 51.7% in the quarter vs. 52.3% a year ago
  • Effective tax rate was 39.1% in the quarter vs. 38.3 a year ago
  • Inventories were $203.1 million vs. $155.6 million a year ago

Now let's take a look at Q4 2012 analysts expectations:

  • Net sales of $485.86 million
  • EPS of $0.42 a share
  • Sales growth of roughly 18.5%
  • Gross margins of 53.1%
  • Effective tax rate of 38.7%

In keeping with tradition, Monster Beverage Corp. does not give guidance on quarterly conference calls. I would expect analysts to come out with revised outlooks for Monster Beverage in the coming days, so be on the lookout for realigned estimates, possible upgrades and/or downgrades for shares of MNST.

When a company continues to underperform and fails to meet expectations, the stock tends to suffer, but in the case of MNST, shares have seemingly remained flat to slightly up QOQ. With unsubstantiated rumors surrounding the prospects of Monster Beverage Corp. being acquired, continued strength in free cash flow and a strong share repurchase program, shares of MNST have weathered a pretty strong storm. The storm I speak of is the cloud of negative sentiment regarding the efficacy of Monster Energy drinks, increased litigation and scrutiny of the company and its products, potential sales bans proposed by senators and other state officials and most importantly weakened sales growth and profitability. These headwinds have been a daunting task for the company over the course of the last couple of quarters, but shares of MNST have seemingly stabilized. We shall see what the future has in store.

In terms of the most recent share repurchase program, the company outlined the program on the quarterly conference call. During the 2012 fourth quarter, the company purchased 6.7 million shares of common stock at an average purchase price of $50.86 per share for a total amount of $339.6 million, this excludes broker commissions. Over the full 2012 year, the company purchased a total of 13.5 million shares of common stock at an average purchase price of $54.47 per share for a total amount of $737.1 million, also excluding broker commissions. Subsequent to December 31, 2012, the company purchased an additional 300,000 shares of its stock at an average purchase price of $51.99 per share, which exhausted the availability under the current repurchase plan.

Now that the company has completed its existing share repurchase program, company officers will address what to do going forward with the existing cash on hand during the February 29, 2013 Board Meeting. Investors will likely know one way or another if the Board has approved another share repurchase program in the coming weeks.

Let's now break down what tripped up the company again in the fourth quarter:

  • Less robust growth for the energy category as a whole and Monster Energy in principal markets such as the United States.
  • Lower sales of Monster Energy Extra Strength Nitrous Technology and Worx Energy shots.
  • Flat sales in the Warehouse division
  • Increased costs of apple juice concentrate
  • Higher distribution expenses
  • Higher selling expenses
  • Foreign currency loss of $2.7 million
  • Softness in sales of some Rehab skus which saw a benefit last year through line-extensions, but were not sequential this year.
  • Distributor termination expense of $0.9 million in the quarter following the termination of the previous distributor in Brazil.
  • Negative sentiment may have impacted sales as scrutiny of the energy drink category seemed to be focused on Monster Energy drinks and not the category as a whole.

Monster Beverage is a global company with its business touching all corners of the world. While the company continues to expand its distribution reach, profitability continues to come under pressure as gross margins in the quarter decreased at an accelerating pace. As noted earlier, gross profit margin fell to 51.7% vs. 52.3% the same period a year ago. Notable reasons for continued deterioration in gross margins were increased operating expenses, raw material expenses and product damages. We don't see these fundamental pressures on the business relaxing near term without meaningful regional production in Asia combined with consolidation of the energy drink industry. In other words, as long as Monster is producing goods for the Asian market, shipping and damages from shipments will curtail gross profit margins for sales in the region. Additionally, the energy drink category continues to expand and new competition is forcing Monster Beverage Corp. into a never-ending cycle of increased marketing expenditures. A note out from Goldman Sachs this morning outlines that MNST's gross margins are stable, however, how can this be if they continue to fall YOY.

There may be a silver lining in the recent results out of MNST. In the United Kingdom, according to Nielsen, Monster's market share is now approximately 10%. Overall, Western European and African operations are now operating well, and the company has made good strides in increasing distribution levels and sales. The Central and Eastern European region is still incurring operating losses, although the company is continuing to see improving benefits from the strategic changes it began to implement last year.

Monster also had several successful expansion efforts in the most recently ended quarter. The company launched Monster Energy in Slovenia, Peru, Chile, Korea and Singapore in the beginning of 2013, and are continuing with plans to launch Monster in India, Romania, Albania and Croatia and in additional countries in Central and Eastern Europe later in 2013. Monster continues to reevaluate if and when to launch Monster Energy in Argentina in light of the low value chain available in that country for energy drinks.

Operationally, the company achieved reduced operating losses in Australia in the fourth quarter as compared to the same quarter last year. Additionally, Monster entered into a distribution agreement with Ambev for the distribution of Monster Energy drinks in Brazil. Going forward, investors could see meaningful improvement from this distribution partnership in the region.

Moreover, Monster launched several new products during the first quarter. Monster introduced new take-home multipacks of Peace Tea containing 8.4-ounce cans. The company has also decided to launch a new Ultra Blue line extension in the first half of 2013 and to defer the launch of the proposed Ultra Pink line extension for now. Monster is moving forward with plans to introduce Kona Cappuccino in the first half of this year, as well as a new line of 3, 15-ounce energy shakes called Muscle Monster that will contain 25 grams of protein per can. The Monster mini take-home multipacks containing 8-ounce cans were launched in the first quarter of 2013. Initial reception to those products, as well as the Peace Tea multipacks from both retailers and consumers has been positive. Lastly, the company will be launching an additional Monster Rehab line extension, Pink Lemonade + Tea + Energy during the first quarter of 2013.

Fort those of you who are tracking stock-based compensation, here you go. Stock-based compensation expenses were $6.8 million for the quarter compared to $6.6 million for the same period last year, and $28.4 million for the 12 months ended December 31, 2012, compared to $19.4 million for the 12-month period last year.

Source: Monster Beverage Earnings Recap