SodaStream International (SODA) released its 3rd quarter results on Wednesday October 30, 2013, and the stock has taken a healthy beating on the heels of some rather strong results. The company once again managed to beat the bottom line expectations by $.04 a share and narrowly missed on revenues by about $600,000 give or take a few dollars. The company reiterated its full year guidance as follows:
- The Company now expects full year 2013 revenue to increase approximately 30% over 2012 revenue of $436.3 million.
- The Company now expects full year 2013 Adjusted EBITDA to increase approximately 38% over 2012 Adjusted EBITDA of $61.1 million.
- The Company now expects full year 2013 Adjusted net income, which excludes share-based compensation expense, to increase approximately 30% over adjusted net income of $50.0 million reported in 2012.
- The Company expects full year 2013 net income to increase approximately 23% over 2012 net income of $43.9 million
You would be hard-pressed to find another company with SodaStream's growth rate, continuous outperformance and simultaneously witness such a poor stock performance upon the release of quarterly results. But with that said, if you had expected differently then maybe you have not been paying close enough attention. The fact is that regardless of quarterly outperformance, shares of SODA more often than not decline before rising longer term. Now with that being said, long-term investors would be well-positioned to stand steady in the face of share underperformance based on the long-term stock performance and long term outlook for SODA. What do I mean by this? Allow me to elaborate with the following bullet points:
- First, get the idea of a short squeeze out of your mind as an investor. There are several very strong, undeniable reasons this is not possible in SODA as I have always stated and which has always born proof by the historical short interest year after year.
- Second, since SODA commenced its IPO in 2010, the stock has more than tripled in value from that time to its most recent 52-week high. So the fact that the share price will be reflected in the earnings growth is also proven factual.
- Third, even with guidance holding steady at roughly 30% revenue growth and 38% earnings growth, SODA will likely outperform this stated full-year guidance in Q4 of 2013.
- SodaStream's long term guidance denotes reaching $1bn in revenues by 2016. On the latest Conference Call, CEO Daniel Birnbaum noted it may come even sooner than initially offered.
- The company has reiterated it expects gross margins to expand in 2014 and beyond as it is on schedule with regard to increasing capacity from the development of its newly developing manufacturing facility in Israel.
- Sell-out rates remain very strong globally.
So what led to shares of SODA declining by more than 14% in the last two trading sessions since the company released quarterly results? The following chart was taken from SodaStream's Q3 2013 results:
Product Segment Unit Breakdown
Three Months Ended September 30,
Soda Maker Starter Kits
Most investors keyed off of the company's underperformance in reported flavor unit sales. It is important to denote, as I have all-too-often, that SodaStream only reports sell-in results. The average rate of growth for flavors has been in the high teens to low twenty percent range over the last couple of years so this most recent 7% quarterly growth seems out of place for flavor units in comparison. Well if it seems out of place or looks like an anomaly it probably is, right?
The answer to the question above is that it is most likely an anomaly that was well-explained by SodaStream's CEO during the Q3 Conference Call with analysts. The slowdown in the flavor unit growth rate was directly felt through SodaStream's largest retail partner in North America, Wal-Mart (WMT). We had mentioned, in detail, to investors of the inventory reduction at Wal-Mart during the latest period in Capital Ladder's SodaStream Q3 2013 Preview. "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."
The most accurate way to view the issue regarding flavor unit sell-in growth was issued on the Conference Call by SodaStream's CEO: "So some of the syrup sales are pushed from Q3 to Q4, okay that portion. And then if you look at NPD the flavors still remained strong in Q3, it's up 57% over last year and that's in this case an important metric to look at. So for all these reasons and knowing our sales and marketing plans we do expect flavor unit sell in to accelerate in Q4 and we don't see an indication of a material issue here."
For those who are not familiar with NPD Group, the firm offers channel sales data from the point of sale (POS). Point of sale data are pure sales data and are also known as sell-out or sell-through data. Now if SodaStream reported sell-out data we wouldn't be having this issue with shares of SODA, but as noted earlier, SODA only reports sell-in data as part of its quarterly filing in accordance with regulations. Fortunately though, SodaStream does denote, for investors, what the sell-out data is so we can rationalize what the real demand is for its products.
NPD data indicates what the real time demand is from the retailer to the consumer. As noted above, syrup sales in the U.S., in spite of reduced inventory on shelves, still grew at a rate of 57% during the 3rd quarter according to NPD data.
A similar anomaly in the reporting metrics has definitively occurred in the past for SodaStream. Back in February of 2012, when SodaStream reported Q4 2011 results, shares plunged almost 20% in a single day as it looked like demand for soda makers was dwindling. Let's take a look at those Q4 2011 results in the following bullet points:
Fourth Quarter Fiscal 2011 Highlights
- 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
As investors can see in the 4th bullet point, soda maker sales only grew by a mere 8% during the quarter. The reason for this anomaly in machine sales for the quarter was mostly due to ordering and inventory once again. In 2011, SodaStream's Czech distributor bought the vast majority of its full-year inventory needs in the first half of 2011 and did not order in the second half of 2011. This lack of ordering at that time was highly impactful to SodaStream's soda maker unit sales. Also of importance, after this one-off event in Q4 of 2011, soda maker sales reaccelerated to grow by an average of 25% over the last 6 quarters. Facts are facts and they all come to the forefront over time. With all the aforementioned data and information at hand and quarterly flavor units growing only 7% in Q3 of 2013, year-to-date flavor unit sales are still up 47% in the United States.
As an investor, if you had purchased shares of SODA in March of 2012 and after the share price plunged roughly 40%, you would have had the opportunity to grow your value in SODA shares by nearly 100% through much of 2013. History tends to repeat itself.
SodaStream's products will likely be in high-demand through the holiday shopping season as they usually have been. The company announced that it has roughly 16,000 points of retail distribution for its products in the United States to meet the anticipated demand. Retailers have already begun to allocate additional shelf space for SodaStream products. Best Buy (BBY) is currently airing a television commercial which features the Source soda maker kit, and at no cost to SodaSteam (here).
With that said, the company continuously adds to this retail distribution network and has done so in the 4th quarter already by adding 800 K-Mart (SHLD) stores to its retail network. K-Mart will be selling 20 assorted flavors, Jet soda makers and 60L spare/exchange gas cylinders. To support holiday sales and newly expanded doors in the United States, SodaStream will be airing commercial spots later in the quarter to highlight its soda maker systems and syrup brand partnerships.
So what about Japan? Japan is certainly a headwind for the Asia Pacific region, but fortunately it is just a small part of the overall revenue pie at this stage. With roughly 120+ million people in the region, SodaStream expects the country to produce strong results for years to come. In the near term, however, SodaStream's distributor for the region is not supporting the product line with contractually agreed marketing and promotional activity which is contributing to poor sales performance in the region year-over-year. We would expect that if this continues into 2014, SodaStream will commit to taking action with regards to its partnership with Synergy in the Japanese market.
The Asia-Pacific region is still a strong region led by Australia, New Zealand and Korea which are growing nicely. During the 3rd quarter of 2013, Australia added to its retail distribution with Spotlight and Matchbox companies. Looking toward the future, we eagerly expect SodaStream to expand the region with India. There will be additional market expansion in the Americas to mirror that of the Asia-Pacific region by way of expansion into Mexico. While we can't offer details on Mexico and India here, if investors wish to uncover greater details on the two regions and possible time of commenced sales in the regions, look here.
We've discussed the new product cycle and innovation coming to the forefront in the coming months and quarters. SodaStream has now indicated that the new Play soda maker will launch with a price point of $79.99 and will hopefully replace the existing Jet soda maker. The Play soda maker will not go into full-scale production until February of 2014 and will be highlighted at the International Home and Housewares Show in March of 2014 for retail buyers to begin placing orders. In light of the initial pricing forecast from management on the Play, we would expect the company to be able to take some cost out of the system in the coming years and as the consumables become an even larger part of the revenue structure. Management has indicated that when soda makers reach mass market appeal, they would enjoy the ability to retail a soda maker for $49.99. Additionally, we will see an electric version of the Source soda maker roll-out next year to replace the Revolution soda maker. SodaStream's goal is to have unified design standard which portrays the brand name SodaStream and is centered on the Source soda maker design concept. With the existing soda makers, it might not be so discernible to the unwitting consumer that the soda maker he/she is purchasing is an actual SodaStream soda maker because the designs are so different. This strategy should prove beneficial for SodaStream going forward and as new soda makers come into the marketplace.
As SodaCaps are now hitting the market in the United States via Bed Bath & Beyond (BBBY), "Happy Hour" syrup flavors (Night Spirits) will also be available in the United States for the first time via Wal-Mart in the coming weeks. Night Spirits have been a successful part of the syrup portfolio internationally for over a year and with a larger installed user base in North America this year the time has come to expand this product offering. Lastly, SodaStream continues to evolve the way in which flavors are packaged and delivered through the system. The company is currently developing and testing an innovative dosing packaging that will enhance the current dosing ability and delivery of syrups in the system. Details of this new product are also available in the full scale quarterly recap. We might see these in stores during the first half of 2014 alongside other products such as Tear-drop ½ and 1 liter bottles.
The U.S. might be the biggest consuming market in the world, but for SODA, household penetration rates will determine future expansion in the market. We estimate that SodaStream will likely end fiscal 2013 with close to a 1.35 household penetration rate and finish 2014 with just under a 2% household penetration rate. In France, SodaStream holds a much higher household penetration rate but only this most recent quarter has a retail grocer in France added syrups to the ready-to-drink (RTD) aisle alongside brands such as Coke (KO) and Pepsi (PEP). Results from Intermarche won't be discovered for a few months. In the United Kingdom, Sainsbury has been testing some 50 locations with SodaStream syrups in the RTD aisle. This leads us to the U.S. where SodaStream will look to the grocery and drug store retail sector for further market expansion going forward. SodaStream has already indicated it would begin testing grocery more broadly in 2014 and as it usually under promises and over delivers the company has signed up a new grocer during the quarter.
So I'm going to speak more frankly for a brief moment and bottom-line the quarter with some broad strokes and finish with a few closing comments while reiterating a Buy rating on shares of SODA. SodaStream once again beat earnings handily with almost no new pipeline build during the quarter and grew revenues by roughly 29 percent. Organic growth in the U.S. was roughly 36%. This is consistent with the growth we are seeing in same-store-sales data. CO2 sales in the U.S. were up 65% YOY indicating that more and more people are buying and using their soda makers. In the United States consumers are using soda makers to make flavored soda water by and large and not simply to make seltzer water, not in America where sugar sweetened drinks are so widely consumed certain legislation is being offered to tax sugar-sweetened soft drinks in the United States. SodaStream performed a consumer survey in May which indicated that users are actively using their soda maker machines. The sell-in will again catch up with the sell-out as it always does and in keeping with retailers' need to capture every consumer dollar they can.
Many questioned whether or not the company could successfully grow revenues without pipeline build continuation year-over year. That question was largely answered during Q3 and born out in the results with almost no pipeline build during the quarter. Keep in mind that last year the company added about 2,000 doors during the 3rd quarter. In closing out our quarterly recap, SodaStream has continued to deliver strong results even as retailers rebalance their inventory levels ahead of the holiday shopping season. We believe, based on the continuing growth in earnings and revenues, the share price will more accurately reflect the strength of these metrics going forward.