SodaStream Is All Fizzed Out


SodaStream's U.S. distribution roll-out is now saturated and channel inventory issues persist.

Management's guidance of a 2nd half sales acceleration doesn't make sense given deteriorating business trends and sales.

A Pepsi partnership looks increasingly unlikely.

I was one of the early SodaStream (NASDAQ:SODA) bulls. I wrote this article on Seeking Alpha back in 2011 when it was beating and raising earnings every single quarter in the midst of an early innings U.S. distribution roll-out story. In the past 4 years, U.S. distribution retail outlets for SodaStream increased from 2,500 to over 17,000.

The U.S. distribution roll-out is now saturated and the underlying business trends are deteriorating markedly. The first signs of weakness were in the Q4 2013 results, when gross margin fell from 42.4% vs. 53.0% the year before.

"The decline was primarily attributable to lower average sell-in prices due largely to year end discounting and promotions, higher costs as the result of moving product between markets and channels combined with an increase in bundled promotional packs" - Q4 2013 earnings press release

The company basically admitted they had a tough time selling sodamakers and was forced to cut prices to move inventory, a clear sign they were having channel inventory issues. And these channel stuffing issues showed up clearly in the Q1 2014 results.

Americas revenue went from +16% y/y in the December 2013 quarter to -28% y/y in the March 2014 quarter. Sodamaker revenue went from +18% y/y in the December 2013 quarter to -25% y/y in the March 2014 quarter. Sodamaker units went from +39% y/y in the December 2013 quarter to -22% y/y in the March 2014 quarter.

The company on the earnings call said sales will also be weak in the second quarter as they still work off the bloated inventory in the channel. On the call management said challenges in the Americas sell-in was due to softer than expected sell-out. I quote, "weak holiday sell-out" and "excess inventory carried over from Q1." The company also gave NPD retail sell-out numbers of -19% y/y for sodamakers. They also said there would be no meaningful expansion into the grocery and drug channels anytime soon, probably later in 2015 at the earliest.

For a razor / blade business model, when the sales of the razors (the sodamakers) start falling dramatically it forebodes weak sales for the blades later on (the CO2 refills and flavor units).

Even with these deteriorating metrics, SodaStream didn't bring down the +15% y/y revenue growth guidance for the full year. Management tried to convince investors on the earnings conference call sales would "accelerate" in the second half the year due to better marketing messaging.

Instead of extolling 5 different benefits of using Sodastream, the company will now focus on health and wellness message. I'm skeptical that this marketing messaging change to lower sugar consumption using a sugar substitute as a health benefit, instead of the previous messages of not having to lug around heavy bottles of soda or saving the environment from lower plastic bottle waste, is going to drive sales higher.

The stock price has also been supported by speculation of some kind of partnership deal with Pepsi as a response to the Coca-Cola partnership with Green Mountain's coming cold single-serve soda machines. An analyst asked about speculation that the reason why no deal has been done was the way SodaStream works, which gives consumers the ability to add as little or as much cola syrup as they want. The analyst said maybe companies like Pepsi want to make sure their product tastes the same to protect their brand. The SodaStream management in response went into a meandering defense of their product's ability to adjust syrup amounts as they are all about consumer choice. The way the management defiantly responded made me feel a Pepsi partnership is not in the cards.

With SodaStream's underlying business trend deterioration of sodamaker inventory channel issues, distribution saturation, and weak sell-through, I find it highly doubtful sales will re-accelerate in the second half of 2014 as the management is guiding. The only material difference will be a marketing messaging change to health & wellness, which will not be enough to change the tide.

I believe the company will materially miss its sales guidance due to continued weakness in the second half of the year, there will be no significant deal with Pepsi, and the stock will trade much lower. My fair value for the company is 15Xs estimated earnings power of $1.25/share = $18.75 stock price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.