It's safe to say that at some point in time most every investor has witnessed one of their favorite company's stock fall from Grace and that is exactly what happened to SodaStream (SODA) recently. The company announced preliminary 4th Quarter 2013 results which sent the stock plummeting to its lowest levels since 2012. In the company's official press release, SodaStream's results showed another record sales quarter; however these record sales were maligned with vastly deteriorated profit margins. The results are likely not entirely due to a lack of demand for SodaStream products as a vast portion of SodaStream distributors reported low inventory and out of stock displays for machines and starter kits. One of the factors, which likely contributed to Soda Stream's profit issues in the U.S. during the quarter, was the overwhelmingly weak consumer.
Whether it was Sears (SHLD), Best Buy (BBY), Bed Bath & Beyond (BBBY), Kohl's (KSS), Wal-Mart (WMT) or any of the host of retailers and/or consumer good companies, the results speak volumes with regards to where and how much the consumer spent this past holiday shopping season. Despite a nearly 15 percent decline in shopper foot traffic compared to the previous year, national retail sales increased 2.7 percent during the holiday season, according to ShopperTrak. Yes, it's an increase. But ShopperTrak's data "marks the first time since 2009 that sales growth has fallen below 3 percent," Reuters reports.
We understand that no singular issue can cause such a dramatic decline in profit margins for a company, so until SodaStream offers greater insight and details into its already released preliminary results, we'll wait to comment further on the 4th quarter. For now though, let's focus in on some of the recent developments surrounding the company.
In lock-step with last year, SodaStream participated in advertising its products and company message during the Super Bowl. Last year's Super Bowl commercial campaign poked fun at the major carbonated soft drink producers, Coca-Cola (KO) and PepsiCo (PEP). While the advertisement was banned from viewing during the Super Bowl, it did manage to create a great deal of buzz around the company as it received several million hits on YouTube. And in lock step with last year, SodaStream created a new commercial that once again offers recognition to Coca-Cola and PepsiCo's business, but in a more subtle way. Yes, Fox rejected this commercial in the same manner as CBS rejected SodaStream's Super Bowl commercial last year. SodaStream decided to amend its commercial for the Super Bowl just like it did last year, but the unedited version will get air time in other media outlets as it has already gone viral with over 7mm hits on YouTube.
One thing which was different about this year's Super Bowl commercial from SodaStream is the usage of its first ever Global Brand Ambassador, Scarlett Johansson.
In SodaStream's official press release announcing its partnership with Scarlett Johansson, the award-winning actress had the following to say:
"I've been using the SodaStream products myself and giving them as gifts for many, many years," said Johansson. "The company's commitment to a healthier body and a healthier planet is a perfect fit for me. I love that the product can be tailored to any lifestyle and palate. The partnership between me and SodaStream is a no brainer. I am beyond thrilled to share my enthusiasm for SodaStream with the world!!"
I like the new promotional approach by SodaStream and its new Super Bowl commercial better than last year's approach which basically highlighted the KO and PEP brand while mocking their antiquated business models. We will have to wait and see how the consumer responds to it.
SodaStream is no stranger to scrutiny as indicated by the share price and/or media attention aimed at the company and its origination of manufacturing for certain products. SodaStream has several factories in Israel, but one of these factories is located in what is commonly referred to as 'the disputed territory" of the "West Bank". I had the pleasure of visiting this facility in October of last year and found the region and the factory to be dramatically different than what is portrayed in our local media.
First and foremost, a great deal of scrutiny is launched at SodaStream because investors believe that it is a prime target for terrorist attacks or a regional attack in general from Israel's antagonists such as Palestine, Iran or any number of militant groups such as Hezbollah which support the Palestinian effort to eradicate Israeli nationals from the disputed territories of the "West Bank", and for that matter, the world. What most investors or anybody in general doesn't realize is what lies within the following picture:
This picture is of the drive up to the SodaStream Mishor Adumim plant in the disputed territory of the West Bank. It is secured by a gated entry and exit fenced-perimeter. What is most important though is what is beyond that fence in the picture. Just beyond the perimeter fence is a heavily-armed, Israeli military outpost.
SodaStream's new manufacturing facility will be located in Israel Proper. The new facility will help SodaStream operations greatly and improve gross margins for the company which currently sub-contracts a good deal of manufacturing in China and elsewhere around the world. SodaStream has several sub-contractors in China which it will likely not need in the future to the extent they utilize them today.
In a recent development surrounding SodaStream and its polarizing plant operations in the disputed territory, the French Court ruled in a case pinning SodaStream against the Association France Palestine Solidarite (AFPS). The French court has ordered the Pro-Palestinian Authority group affiliated with the Boycott Israel movement to compensate the company and to stop all activities alleging that SodaStream products are illegally made and sold. The court concluded that a boycott, even if instituted for political or moral considerations, must be "fair" and not abusive, a condition that AFPS violated by defacing a SodaStream advertisement and covering it with an image of blood as part of its smear campaign. AFPS told retailers and the public that SodaStream products were being sold illegally and, according to the company, "advised French stores that selling SodaStream products constitutes a fraud, and that store managers could be prosecuted for doing so."
So let's wrap this article up with a couple of other notable points regarding SodaStream's business. SodaStream scored a big victory recently when Bed Bath & Beyond decided to discontinue the sale of the Cuisinart soda maker and soda maker accessories. In its place, BBBY now has replenished itself with the SodaStream $79.99 Jet starter kit to sell alongside the Genesis, Source and Revolution soda maker kits. This greater distribution of the Jet starter kit offers SodaStream greater ability to sell-down its inventory of the Jet as it begins to mass produce and market its new Play soda makers which will replace the Jet in the future, more than likely. The Play aims to unify the soda maker design model around the Source soda maker design which distinguishes a SodaStream product vs. its competitors.
Not to be left out of the story, Hamilton Beach's heralded entrance into the soda maker category has also been short lived with both Wal-Mart and Target (TGT) slashing prices on the vendor's Fizzini soda maker products. Remember, this was what Bed Bath & Beyond did to the Cuisinart product line before the retailer discontinued the product. I would expect the retailers to clearance and/or discontinue sales of the Fizzini in the near future as sales for the product are less than 10% of SodaStream sales. The bottom line for both of these product offerings is that they simply could not offer the same cost comparison with SodaStream products which are closer in cost to store bought sodas.
SodaStream will continue to need to address the weakened consumer in the U.S. as it is one of the firm's largest markets by sales volume. With the consumer cutting back on discretionary goods as indicated earlier in this article, all consumer good companies are forced to cut prices on their respective goods. Green Mountain (GMCR) also slashed its prices on Keurig products during the holiday shopping season. SodaStream is no different which is why the firm indicated in its preliminary results that it would likely continue to see margin pressures in the first half of 2014. While the U.S. consumer continues to spend more modestly than in the past, SodaStream has decided to reduce its cost per soda maker kit in order to maintain growth in its user base to provide for future revenues from these active users who buy more CO2, syrups and bottles.
Japan likely remained a growing concern for SodaStream during the 4th Quarter of 2013 as the firm appointed a Market Director for the Region and has several employment opportunities to lead the region currently available. Japan is a distributor market for SodaStream, but the distribution partner has not been showing signs of building the brand appropriately over the course of 2013 and SodaStream may be steering toward acquiring the rights to the Japanese market in the near future. In addition to this probable scenario developing, SodaStream is looking to secure a refilling station site in the region. SodaStream purchased the rights to the Italian market in the 2nd Quarter of 2013 and always recognizes the benefits of sole market ownership as they tend to bare higher profitability than distributor owned markets over the long term.
On January 29th, SodaStream announced a new partnership with Welch's. This partnership will produce the launch a line of sparkling drink concentrates co-developed exclusively for the SodaStream home beverage carbonation system. The products are expected to be available during the second half of 2014 in the United States. The terms of the agreement were not disclosed. To remind investors, SodaStream will launch its co-branded V8 and Eboost flavors in the first half of 2014 as well.
The consumer in the United States is making it difficult for retailers and vendors like SodaStream to continue to increase profits currently, and the winter frost isn't helping either in the northeast region of the country. SodaStream has its work cut out for itself over the next 6 months and investors should listen into the upcoming earnings call to see how the company plans to right fit its business alongside the consumer over the course of 2014. I continue to believe in the business of SodaStream as I see first-hand the sales coming across my desk on a daily basis. It's not a matter of whether or not the consumer wants a SodaStream, it's at what price they are willing to spend given the economic climate which is indicated by the following sales sheet from one of SodaStream's retail partners in the United States.