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SodaStream International (NASDAQ:SODA) will report Q3 2013 earnings on Wednesday October 30th ahead of the opening of the trading day. Since launching its IPO in 2010, the company has successfully managed to beat analysts' estimates each and every quarter. In order to achieve such a rate of outperformance, two situations must be presented: 1. Strong management execution of the business model 2. Lack of knowledge regarding the totality of the SodaStream business by the analyst community. The third quarter of any given year has generally been the company's strongest quarter, representing the largest outperformance due to heavy orders issued by retailers ahead of the holiday shopping season which takes place in the 4th quarter of the fiscal year. With this in mind, let us take a look at the analysts' expectations for the current quarter as provided by Capital IQ.

Earnings Est

Current Qtr.
Sep 13

Next Qtr.
Dec 13

Current Year
Dec 13

Next Year
Dec 14

Avg. Estimate

0.73

0.67

2.57

3.33

No. of Analysts

11.00

10.00

10.00

11.00

Low Estimate

0.66

0.46

2.50

2.98

High Estimate

0.99

0.78

2.62

3.53

Year Ago EPS

0.80

0.36

2.09

2.57

Revenue Est

Current Qtr.
Sep 13

Next Qtr.
Dec 13

Current Year
Dec 13

Next Year
Dec 14

Avg. Estimate

145.20M

171.38M

567.26M

672.46M

No. of Analysts

9

9

10

10

Low Estimate

141.80M

165.00M

563.30M

594.00M

High Estimate

149.60M

176.00M

572.00M

717.54M

Year Ago Sales

112.48M

132.95M

436.32M

567.26M

Sales Growth (year/est)

29.10%

28.90%

30.00%

18.50%

Investors should take note, and fully recognize the YOY assumed decline in Q3 earnings. The justification for this anomaly was fully forecasted by SodaStream during their Q2 2013 quarterly conference call in which they noted a more evenly distributed A&P spend which would begin this year. In pure dollar-terms, the company has planned to allocate a 45/55 split in A&P spend in the back half of the year where in years past the A&P split was closer to 35/65 for Q3/Q4. This new methodology for A&P spend in the back half of the year also explains the significantly higher earnings estimate for Q4 2013 vs. the year ago period even when adjusted for normalized growth. Lastly, Capital Ladder Advisory Group would ask investors to recognize that many investors would simply look toward the analyst estimates and not have read through the Q2 2013 quarterly transcript for clarification on the cadence of expected earnings for the 2nd half of the year.

SodaStream Operations

During the period ended September 30th, SodaStream has continued to build out its new manufacturing facility which is located in Israel Proper as opposed to the current, smaller facilities which are located in the disputed territory. At present, the new manufacturing facility has fully laid foundation, walls and a newly constructed roof to enclose the new facility. SodaStream expects to begin assembly operations within the new facility beginning in Q4 of 2013 as originally scheduled. As progress on the new facility continues through 2014, other aspects of the manufacturing and production process will commence.

With consideration that SodaStream has been utilizing 3rd party manufacturing to support consumer demand as it continues to build its new manufacturing facility, what isn't understood is that this is mainly occurring for its syrup line of products. The company still manages to maintain excess capacity with regards to most other product lines including soda makers.

Expansion Operations And Wal-Mart (NYSE:WMT)

Investors continue to anticipate SodaStream's outlined expansion into markets such as Mexico and India. Regardless of when these expansion efforts are realized, same store growth will be heavily relied upon in the back half of 2013 as originally expected at the onset of the fiscal year. Yonah Lloyd, Corporate Development and Communications Officer of SodaStream, noted that expansion into Mexico and India has to be done right due to the economically sensitive market demographics of the 2 respective countries. As we put Mexico and India on the back burner for the time being, we recognize that SodaStream continues to grow in existing markets on a YOY basis. During the 3rd quarter this year we recognize that the company grew doors at its slowest pace in recent quarters. We estimate the company grew its door count by under 500 doors through expansion in existing markets. The YOY door growth, however, represents closer to 3,500 doors of expansion around the globe. As Capital Ladder has noted throughout the year, 2013 will represent a shift from door growth to dollar growth in existing doors. Additionally, SodaStream has proven in the 1st half of the year that it is able to increase dollar growth significantly in existing doors with high sell-out rates and beneficial retail partner support such as that from the likes of Wal-Mart point of purchase.

Wal-Mart continues to be a proud supporter of the SodaStream product line and company initiatives. In the most recently completed quarter, Wal-Mart has decided to roll-out the Source model soda maker to all participating Wal-Mart locations. Last year, only 1,500 locations sold the Source soda maker and this year that number will increase to roughly 3,500 locations.

As it pertains to Wal-Mart's dedication to the SodaStream product line, Daniel Birnbaum recently visited the United States to meet and discuss product placement, replenishment and overall sales issues he has uncovered during the quarter with Wal-Mart's management team. Recent stock levels during the month of October (Q4 2013) have curtailed sales growth during the month due to a new plan-o-gram roll-out for the SodaStream product line. Wal-Mart has a strong desire to capitalize on an opportunity with SodaStream that they sorely missed out on with regards to the Keurig product line in the decade past. Not wishing to make the same mistake twice, the company engaged Mr. Birnbaum in dialogue concerning how they can achieve the No. 1 status going forward. We believe the results of this dialogue will be seen in the coming months.

During the 3rd quarter, Bed Bath & Beyond (NASDAQ:BBBY) has already increased its SodaStream shelf space by roughly 40% as it added 8 varieties of SodaCaps, 2 Ocean Spray flavor skus, dishwasher-safe bottles, 130L Spare CO2 canisters and the Revolution soda maker at over 870 locations.


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What can be viewed in the above photos is a representation of dedicated product positioning by Bed Bath & Beyond who aims to capitalize on new product initiatives from SodaStream in advance of the 2014 holiday shopping season. As investors can determine, Wal-Mart has its work cut out for itself if the company desires to be the No. 1 SodaStream retailer in North America.

Moreover, with respect to growing dollar/door, SodaStream has more broadly distributed the availability of the 130L Spare and Exchange canisters during the most recently ended quarter. Office Depot (NYSE:ODP), Bed Bath & Beyond and Staples (NASDAQ:SPLS) are all carrying the 130L Spare and Exchange canisters now. The 130L products represent strong YOY pipeline builds for the CO2 product line and add to the value proposition of the SodaStream system. There is also the added convenience of exchanging the canister less frequently. Additionally, what is being represented in the 130L CO2 product line is SodaStream's pricing power and its ability to take cost out of the system. Any competing product will have a very difficult of equaling SodaStream's value proposition while achieving profitability.

Regional Roundup

In closing out the expansion operation portion of our Quarterly Preview, we will now take a moment to outline and update various regional activities for SodaStream during the quarter. Capital Ladder still anticipates a strong sell-in 3rd quarter with the Japan market expanding its door count YOY by nearly 80 percent. As the CO2 certification carries forward, the sell-out will also prove to catch up with the true demand. Yonah Lloyd recently noted that the company's CO2 certification process in Japan needs to further take shape. SodaStream sees very strong demand and growth for years to come in Japan.

In the CEMA region, SodaStream seems more optimistic about the region going forward. The company has witnessed its struggles with the region due to economic shifts that downplay the underlying strengths within the individual economies of Hungary, Slovakia, and the Czech Republic. Poland continues to see strong demand for SodaStream products with the retail distribution growing year-over-year. We will have to watch and see if the CEMA region can recapture its glory days of yesteryear for SodaStream.

Brazil is a key market for SodaStream going forward and with the World Cup taking place in June of 2014 the company has plans to grow within the region. While revenues continue to grow in Brazil, it is important to note that meaningful profitability will only come through local production as SodaStream has indicated. High tariffs placed on imports are an obstacle for all companies doing business in the nation. SodaStream is in talks with several producers to begin local production in the future. Central and South America will represent larger portions of revenues and earnings growth for the Americas region as a whole in 2014 with growth from Brazil, Chile and other aforementioned market expansion .

In North America we have seen incremental door growth with the addition of Bealls Department Stores and increased store counts from Bed Bath & Beyond, Target (NYSE:TGT), Wal-Mart, Costco (NASDAQ:COST) and more. Additionally, SodaStream has expanded its partnership with Amazon.com (NASDAQ:AMZN) to include direct sales to the on-line retailer. In the past, Amazon represented a middle man between the consumer and SodaStream, with Amazon holding only incremental inventory of SodaStream products. The newly expanded partnership will now have Amazon warehousing SodaStream products to help meet on-line demand. To reiterate, the North American market will continue to see most of its growth from two factors: 1. Dollar/door growth 2. Grocery, drug and DIY expansion going forward.

Germany and France continue to provide SodaStream with strong growth in revenues as these markets add to the current level of household penetration rate. Both regions began the year with around 4.5% household penetration rates, but will close-in on 5% household penetration by the end of the fiscal year or in the first couple of months of 2014. It may only be a matter of time before French retailers begin shelving SodaStream in the ready-to-drink aisle beside PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO).

In Australia, SodaStream has expanded its retail distribution this year to include Matchbox and Spotlight retail stores. Additionally, the Samsung sparkling refrigerator is now available in the region. In the coming weeks, Night Spirits will also be distributed in the Australian market.

Lastly, and very much under the radar, is SodaStream Professional (NYSE:SO). The company finished the first half of the year with 350 points of usage for SO products. We would advise investors to learn how many more points of usage the SO product line has added in the 3rd quarter.

Product Cycle/Innovation

This year, SodaStream has broadly rolled-out the Source soda maker to most participating retailers around the globe. The Source has been the fastest growing soda maker in the product line during the 3rd quarter by Capital Ladder's channel sales data from a host of participating retailers.

It was originally planned that the AquaBar, which debuted last year in Milan and is co-developed by Stephano Giovannoni, would reach retailers by the second half of 2013 in Europe. However, the need to advance the technology within the machine has resulted in a delayed launch of the product line, yes product line. SodaStream has decided to take the initial design and functionality of the AquaBar a step further and is in the process of completing the Ultimate AquaBar.


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The photograph above represents the original design and functionality of the AquaBar. Both AquaBar machines will remain plumbed in machines and are now expected to be distributed in 2014.

The Play soda recently made its debut at the London Design Festival. Much like the Source soda maker, the Play was designed by Yves Behar and shares similar design concepts. The Play will be offered in 2 versions and with 2 price points. The Play will work with either the 60L or 130L CO2 cylinder, providing even greater user flexibility.


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The photos above were taken at SodaStream's headquarters. They depict the Play machine being put to the test and scrutinized. The Play soda maker will begin mass production in February of 2014. As a noted innovation aspect of the Play soda maker, all Source machines being shipped beginning in January of 2014 will have the auto-lift soda head feature. This takes one more step out of the at-home soda making process which SodaStream is always considering as it innovates its products.

SodaCaps have launched in various markets during the second half of the year and have recently come to the United States via Bed Bath & Beyond as noted earlier. SodaCaps are offered at a premium price but still offer quality ingredients as a healthier alternative to the leading CSD brand beverage providers. Ocean Spray flavors have also hit shelves at Bed Bath & Beyond in the most recent weeks in a variety of 2 flavors to begin the product introduction. The important function of this co-branding deal and product is that unlike many Kraft flavors in the SodaStream system currently, the Ocean Spray flavors are an international brand which is widely distributed in Europe and other regions. Next year, it is possible that Ocean Spray could be more broadly distributed beyond North America.

Capital Ladder Advisory Group's full scale Q3 2013 SodaStream Preview is now available at capitalladders.com. For those who want a lot more detail on SodaStream's 3rd quarter, it is all included in our 19 page report as follows: Channel sales data during the most recently ended quarter including direct sell in data, fully detailed/region-specific information, details on SodaStream/V8, Ultimate Aquabar, India and Mexico details including why and when, planned product launches, stock-based compensation package impact on earnings in 2013 and beyond, Capital Ladder's full quarterly projections, metrics and much more.

Source: SodaStream Q3 2013 Earnings Preview