SodaStream Q2 2012 Earnings Preview

Soda Stream™(SODA) is due to report 2nd quarter earnings before the opening bell on August 8, 2012. These results are going to be highly scrutinized by investors after the company reported a better than expected 1st quarter and raised full year guidance. Analysts are looking for the company to earn 46 cents a share in Q2 on revenues of $90.5 million. Given a multitude of new distribution deals which took place in Q2 along with strong sales and recently increased guidance, Capital Ladder Advisory Group, LLC is looking for results to come in better than expected for the quarter.

Although Soda Stream has issued higher guidance for the full year, the company's suggestion that they will remain dedicated to advertising and promotion for the balance of 2012, makes forecasting quarterly results difficult for the analyst community. Analysts are forced to assume that superfluous revenues and/or earnings may be directed at greater brand advertising efforts. Due to the relative youth of the company, tracking Sales and Marketing spend will be more effective as the company and the brand matures.

Before we get into this quarter's operations and highlights, here is a look at Q2 2011 results:

  • SodaStream™ sold 634,000
  • 6.1 million flavor syrup units sold
  • 3.4 million CO2 units sold.
  • Total revenue was $69.1 million
  • Earnings came in at $.41 a share.

A number of institutions have picked up shares of SODA as the stock price declined and as other institutions lightened up on their positions in SODA. Current institutional ownership of SODA rests around 93% of float. Notable institutional buys during the quarter have come from Morgan Stanley, Black Rock, Wells Fargo (addition), Flood Gamble Associates, Nomura, Paradigm Capital Corp. and Cadian Capital Management. Notable institutions selling shares during the recent quarter were Principal Small Cap, Sam Sustainable Fund, Winkler Investments and Brown Advisory Small Cap Fund. We would like to remind investors that there is an abnormally disproportionate institutional participation in SODA compared to the industry average which can cause the PPS to be quite unpredictable.

From an operational standpoint, there has been a relative status quo in business operations at Soda Stream. The company remains focused on achieving greater market share through increased visibility of its product line and by increasing the convenience factor. Many retailers in the US and abroad do not participate in Soda Stream's gas exchange program, but management remains steadfast in assisting existing retail partners with the certification and adoption of the logistical process. Greater participation among the retail partners will serve to increase the convenience of Soda Stream's business model and add to the retention of its user base. In the US, major retailers currently not participating in the gas exchange program are Target Corp.(TGT), Kohl's (KSS), JC Penney (JCP) and Best Buy (BBY) just to name a few. In the UK, the largest retailer not participating in the gas exchange program is Tesco PLC (TSCDY:OTC). However, our latest conversation with Yonah Lloyd indicates that Tesco has completed the CO2 certification process and Tesco will be participating in the gas exchange program imminently. We would anticipate greater adoption of the CO2 exchange process on a global scale as retailers see how profitable it can be. Bed Bath and Beyond (BBBY) in the US is currently the largest retail participant by sales volume with regards to CO2 gas exchange. According to channel checks gathered by Capital Ladders, CO2 sales will likely grow by 110-120% for Bed Bath and Beyond in 2012.

During Q2, the company has also seen advancement through the Soda Inside initiative. On June 4th, the company announced a deal between Soda Stream International and Breville Group Limited that would create a soda machine to be distributed by Breville, but utilizing Soda Stream technology. The details of this deal between the two parties have yet to be released, but Soda Stream will most likely update investors during the Q2 earnings conference call.

As outlined in Capital Ladders research piece on Soda Stream, we discussed a probable expansion of the current licensing agreement between Kraft and Soda Stream to include Kool-Aid™ and CapriSun™. It has since been announced by Soda Stream that this agreement would in fact take place, and investors are pleased to hear that Kool-Aid flavors will be added to the product line during the fourth quarter of 2012.

The biggest development for Soda Stream since the latest earnings were released has been the roll-out of Soda Stream products to the company's newest retail partner, Wal-Mart. The launch rolled out to 2,900 Wal-Mart stores over the last month and was met with strong sales results. On a side note, Kraft flavors also launched during the current quarter and have shown to be a great addition to the current line-up of flavored syrups. Our recent sales checks have shown that consumers are not buying the Kraft line of flavored syrups instead of their normal syrup purchases, but rather, in addition to their normal purchase of flavors. The broader distribution of the half liter bottles have also been met with strong sales. In Bed Bath and Beyond, where the half liter bottles debut, sales have doubled on a bi-monthly basis.

The launch of Wal-Mart and the Kraft flavors came just in time for the strong Father's Day retail holiday. We remain focused on machine unit sales per door/week as the average "door" selling Soda Stream machines is of key importance to investors and will remain so as the growth of machine unit sales will indicate future growth or contraction for Soda Stream International. According to our latest channel checks from roughly 2,400 Wal-Mart stores, we have discovered that the average store is selling 2.9 machine units per door/week since the product's launch. According to our research, we feel that the expected results for machine units will be dependent upon sales consistency coming from Europe and the surrounding regional countries as sales from the Americas will likely outperform in the most recent quarter ended.

Since the company last reported earnings, there had been little clarity with regards to ordering from both the Empire distributor (now owned and operated by Soda Stream Int.) and the Czech Republic distributor. Most recently we have been able to see that relatively small orders have resumed from the Czech distributor, but normal size orders are unable to be determined at this time do to the irregular order the distributor placed in Q1 and Q2 of 2011. We also understand that Empire re-stocking has commenced in the recent quarter ended June 30th. Moreover, the summer months will surely require additional inventory to be available for Empire (now owned by Soda Stream) to replenish retailers selling greater quantities of flavored syrups and CO2. Investors should also note that the Nordic region will add greater margin expansion for Soda Stream now that Soda Stream owns the Empire distributor.

In 2011, Soda Stream initiated a law suit against Viking Soda. A favorable verdict was reached in the month of June that awarded Soda Stream International royalties based on misappropriated patent usage by Viking Soda. An application to appeal this ruling by Viking soda can be submitted to the court not later than July 6. Further details on the ruling can be found at

It is our belief, based on discussions with Soda Stream's management, to suggest this ruling will serve to prove that Soda Stream is willing and able to defend its patents internationally. Soda Stream's management may not expect the ruling against Viking Soda to impact its financials in any meaningful way.

Now we will focus on some key developments investors should anticipate in the future. Soda Stream will continue to focus on the core business model as it develops partnerships and expands its global reach. With India and Greece on the horizon, we also would anticipate a smaller country like Luxemburg to join the Soda Stream team in the near future as surrounding countries already retail the Soda Stream product line. Although this is a relatively small country it will certainly add strength and market dominance for Soda Stream. We would also expect Soda Stream Int. to further develop the Latin American markets by way of Mexico and Argentina in the future.

Investors would serve themselves well by reading through all Soda Stream corporate filings including the latest annual filing. Within the annual filing are key statements that could adversely affect the company's ability to meet earnings expectations. A disclosure in the most recent annual filing outlines the current litigation regarding assumed tax liabilities owed by Soda Stream International to the German Government. The German government initially claimed in the law suit that Soda Stream international has tax liabilities dating back several years. As of May 2012, the German court of appeals has closed a few of the years in question, finding that Soda Stream has appropriately distributed all appropriate tax payments owed to the German government. Although the recently closed portions of the German litigation are a positive development for Soda Stream, the relevance of this development remains high as other countries could more closely scrutinize Soda Stream's transfer pricing practices.

As noted earlier in this report, CO2 is proving to be a great repeat business for retailers and we would expect further adoption of the CO2 exchange by existing retailers. With great sales coming from Target Corp. and Wal-Mart already adopting the CO2 exchange process, it is very possible that Target Corp. will add the CO2 SKU and exchange process to its Soda Stream product assortment in the future.

While the company appears to be executing on all core objectives, we do have some trepidation when it comes to this earnings cycle. As we have mentioned earlier in this quarterly preview, Soda Stream will remain dedicated to spending revenues on Advertising and Promotion. Recently in the UK, the company launched its summer ad campaign which costs Soda Stream roughly 2 million euro. While we still expect the company to surpass earnings and revenue expectations for the quarter, the Sales and Marketing spend could curtail the size of the beat when earnings results are reported and this may impact growth expectations.

Secondly, with the euro falling as much as it has in the second quarter of 2012, we can't ignore the possible impact this could have on Soda Stream's earnings when reported. Soda Stream utilizes a "rolling carpet" hedging strategy with over 50% hedged during the upcoming 6-month time period, then less over the next 6 months (but of course as it rolls forward it changes). This strategy has worked nicely for Soda Stream in the past, as it is quite effective to help the bottom line in a weakening Euro environment. However, it is important to note that a hedging strategy simply lessens the impact of a weakening currency and does not offset it entirely.

Thirdly, investors will need to consider the likelihood of a possible secondary offering when earnings are announced. While Capital Ladder Advisory Group believes this has only a 25% chance of occurring, it is notable given the business cycle. In April of 2011, the company held a secondary offering and we are only a few short months ahead of that annual event. If we take into consideration the company's consistent cash burn rate and the dedication to brand development and expansion efforts, we could assume that a secondary offering is certainly possible. We only give this event a 25% chance as Soda Stream has suggested to investors that they will be cash flow positive in the quarter and for the balance of 2012, thus the need for a secondary offering is usually unnecessary.

For greater details and full quarterly projections regarding Soda Stream International, visit us at and download our full SODA Q2 Earnings Preview.

Disclosure: I am long SODA.

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