SodaStream International, Ltd. (SODA) is due to report 3rd quarter earnings before the opening bell on November 7, 2012. These results are going to be highly scrutinized by investors after the company reported a better than expected 2nd quarter and raised full year guidance for fiscal 2012, again. Analysts are looking for the company to earn 72 cents a share in Q3 on revenues of $103.58 million. Given a multitude of new distribution deals which took place in Q3 along with strong sales and recently increased guidance, we are looking for results to come in better than expected for the quarter yet again.
It is keenly important for SODA shareholders to take into account that Q3 is a very opaque quarter for the consumer goods producers sector as retailers order increased volumes of products from said producers like SodaStream International. The ordering cycle in Q3 lands in-line with retailers forecasting for 4th quarter holiday sales. With this important fact, Q3 metrics for Soda Stream can be skewed in either direction based on key retail distribution partners like Bed Bath and Beyond (BBBY), Wal-Mart (WMY) and Tesco around the globe. Additionally, struggling economies in the euro zone may impact projected results in the quarter.
Lastly, although SodaStream 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, especially during times of expansion. SodaStream's Investor Relations Officer points to the company as having an advertising and promotion budget in the range of $15-$20 million to be spent during Q3 and Q4 of the current fiscal year. Due to the relative youth of the company, tracking sales and marketing spending 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 Q3 2011 results:
· Total revenue was $75.7 million
· Earnings came in at $.58 a share
· SodaStream™ sold 717,000 soda machines
· 4.4 million flavor syrup units were sold
· 3.6 million CO2 units sold
*No orders were placed in Q3 of 2011 from SodaStream's distribution partner in the Czech Republic or From Empire, SodaStream's former distribution operator in the Nordic region..
Since reporting Q2 results in August, SODA shares have traded within a narrowed channel compared to previous quarters. On August 8th , shares finished relatively flat on the day, after the company released earnings and guidance for fiscal 2012. The following weeks resulted in a share price decline of roughly 17%, erasing all the stock gains from the May 9th reporting cycle.
However, since this time period the stock has risen steadily on reported orders from Bed Bath and Beyond for new products offered by SodaStream like the Source soda machine by Yves Behar. The Source can now be purchased at participating Bed Bath and Beyond stores for $129.99. We were able to identify the order from Bed Bath and Beyond for the Source and disseminate the highly sought after information to clients, which in part, resulted in a 4% share price appreciation on Monday, October 15, 2012.
From an operational standpoint, there has been a heightened level of advertising and promotion of the SodaStream brand. Based on talks with SodaStream management, the company continues to participate in road shows throughout Europe, South America and Asia where the company continues to drive expansion efforts. In a recent press release, investors read first hand, that these efforts are proving to be impacting for the company. On October 18th, SodaStream announced the entrance into new markets such as Chile and Singapore. The company added to this press release, updating investors on the company's new distributor relationship in Russia.
In Russia, SodaStream will be distributed by Bureaucrat, a leading home and office solution company with over $1 billion in annual turnover, representing some of the world's most popular brands. SodaStream will launch nationwide at Media Mart Russia starting as early as Q1 2013. To make sure investors have even more clarity regarding the newly expanded territories in Chile and Singapore, we have included greater details regarding this latest expansion and other expansion efforts here.
As expansion efforts remain a core focus for SodaStream International, the company will continue to implement ground efforts for the eventual entrance into the key market of India. With India's growing economy and expanding middle class, the country will be a highly accretive achievement for SodaStream in the near future. Along with anticipating India for expansion and the aforementioned additions in Q3 by way of Chile and Singapore, SodaStream is laying the ground work for future expansion into Greece, Mexico and possibly Poland. Poland has been witnessing economic prosperity outside of the euro zone in recent years and has a bustling middle class with an affinity for sparkling, carbonated beverages. The size of the Polish market is comparable to that of the Czech Republic or Japan for Soda Stream. Companies like Coke (KO), Pepsi (PEP) and Monster have benefited from Poland's marketable size and economic growth in recent years. We expect this region to be accretive for SodaStream International in 2013, possibly adding 100-300 doors in the nation from which the company will benefit greatly.
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 U.S. and abroad do not participate in SodaStream's gas exchange program, but management remains steadfast in assisting existing retail partners with the certification and adoption of the logistical process. During the 3rd quarter, SodaStream achieved its goal with retailers in the U.S. Both Target Corp. (TGT) and Kohl's (KKS) began instituting the gas exchange program in the northeastern region of the United States as a test process for nationwide roll-out later in the year. Participating states include Pennsylvania, Connecticut, Massachusetts, New York, New Jersey, Michigan, Vermont and Ohio to name a few.
Greater participation among the retail partners will serve to increase the convenience of SodaStream's business model and add to the retention of its user base. Bed Bath and Beyond was the first retailer in the U.S. to participate in the gas exchange process which has proven to be a greater than $15 million business in 2012 for the company. Also in Q3, the UK's largest retailer Tesco began participating in the gas exchange process. We would anticipate greater adoption of the CO2 exchange process on a global scale as retailers see how profitable it can be.
*According to channel checks we gathered, CO2 sales will likely grow by 115-125% for Bed Bath and Beyond in 2012.
With the holiday shopping season fast approaching, SodaStream has delivered on new product initiatives as SodaStream products gain shelf space with retail partners. New flavor syrups sweetened with Stevia are expected to hit retailers in Q4 along with Kool-Aid flavored syrups in the United States. More and more retailers are now adding the Naturals line of flavored syrups as well. In addition to these flavor additions, investors and consumers are eagerly awaiting the Soda Stream, patent-pending Soda Caps release in the United States.
SodaStream's management has indicated that at least one retailer in the U.S. will be selling Soda Caps in the 4th quarter of 2012. Soda Caps are currently in test markets of Israel and are performing as management expected in the early going. Management has also told investors that the company will be investing roughly $4 million into the Israeli market place in order to expand its brand recognition and drive sales in its country of origin.
The SodaStream Revolution and Source made their way into retailers across the globe in the 3rd quarter. In the U.S., the Revolution and Source can be purchased at participating Williams Sonoma (WSM) and Bed Bath and Beyond stores. As noted earlier in this Q3 preview, we have been able to source orders of these new soda machine products. For additional details on these orders which occurred in the 3rd quarter, please contact us. These orders from key retail partners will help the average investor estimate machine sales in the quarter; don't be left in the dark hoping your company has a good quarterly performance…know.
In the United Kingdom, retailers are also adding new SKUs as SodaStream adds the Night Spirits line of products in the region. Night spirits are a new line of liquor flavored syrups the company has been developing for the last several months. We may see flavors like Mojito, Margarita Cocktail, Cosmopolitan Cocktail and more. The Night Spirits Limited Edition flavors will also be joined with a deluxe Genesis soda machine which will be outfitted with metal appointments as opposed to plastic. It is important to remember that when we think about new products to understand that sometimes, new products will start in specific markets like the latest line of vitamin enhanced flavored drinks which recently launched in Germany , but they will roll-out to greater markets in the future.
At this point we would like for investors to take into account the increased distribution channels for which the company may possibly benefit in the current quarter when compared with the same period a year ago. In Q3 of 2011, SodaStream had roughly 49,000 retail doors around the globe. Since that time, the company has achieved another 13,000 points of retail sale by entering into new markets and adding retail distribution in existing markets. Another key point we would also like investors to take into account is that the Czech Republic distributor in Q3 of 2011 did not institute any orders of SodaStream products.
Our conversations with management suggest that the Czech Republic distributor has normalized ordering patterns in 2012 to include orders that occurred in the 3rd quarter ended. This should serve to enhance YOY comparison sales for SodaStream in Q3 of 2012. Keep in mind that there were key pipeline builds in the UK and Spain during Q3 of 2011, so these pipeline builds might offset some of the orders from key distributors this year in Q3. In addition to this distribution order channel, the acquisition of the Empire distribution operations last year, forced the operator of Empire to halt orders of SodaStream products in Q2 of 2011. Conversations with management indicate that order flow from the newly acquired distributorship normalized in 2012 to include orders in Q3 of 2012. These additional orders should also serve to enhance YOY comparisons for SodaStream.
Based on strong sales in Japan last year during the 4th quarter, which proved to leave retailers in out-of-stock positions for SodaStream products, we would anticipate stronger orders coming from the Japanese distributor this year. Keep in mind that Q3 is typically the quarter for which retailers and distributors order their product for the holiday season. With additional retail doors in Japan in Q3 this year, Synergy (Japanese distribution partner) would be prudent in ordering ahead of the 4th quarter and in keeping with last year's sales trend, possibly tracking up 10-18% YOY.
SodaStream has enjoyed a competitive advantage in this new product segment category of at-home carbonation via the company's first to market brand dominance, a multitude of patents protecting the firm's intellectual property rights and strong management and execution of core objectives. During the Q2 of 2012, Primo Water Co. (PRMW) decided to forgo its efforts in the at-home carbonation segment in favor of focusing on water delivery, purification and water cooler manufacturing and distribution. Primo Water Co. had been attempting to break into the at-home carbonation market over the last 2 years and found little success in doing so as the company competed directly with SodaStream International in the United States.
SodaStream remains the number one brand and promoter of this relatively new product category, but we expect the company to see greater competition in the near future. With high margins and continued growth rates in the product category north of 25% for the foreseeable future, the at-home carbonation category will attract many small appliance manufacturers into the business segment as partners or competitors. One such competitor will launch its own version of a soda machine in the 4th quarter this year.
When discussing competition, we share the same opinion with SodaStream's management team. Competition is healthy and even beneficial for a new product category. Competition builds consumer awareness for the product category and drives up consumption rates. While this explanation of competition will likely prove accurate in the future, market perception may perceive this competitive development differently, pressuring SODA's price to earnings ratio. During the quarter, there was one interesting find related to SodaStream and product development. Through the USPTO, we were able to uncover a probable partnership between SodaStream and Whirlpool.
To conclude this quarterly preview report on SodaStream International, here are some possible updates investors may anticipate on the upcoming earnings release and subsequent conference call:
1. Update on issues regarding the Italian distribution partner
2. Overall health of the Euro region and effects on SodaStream
3. Update on efforts from SodaStream Professional
4. Expansion efforts inclusive of detailed information including efforts
5. Co-branding efforts, on-going talks and status update
6. Status of new product launches during the quarter and future product launches
7. Mention of tax transfer litigation, impact if any
8. Advertising and Promotion updates in the U.S., defined budget for Q4
9. Depending on results, possibly raise full year guidance for a 3rd straight quarter
10. Possibly announce entrance into India for Q1 of 2013 along with naming distribution partner in region.
11. Update on product sell out rates in Brazil
Greater details on the new competition SodaStream faces, including retail distribution and orders are available in our full quarterly preview available on our website. Our full quarterly preview will also detail retail expansion in several regions that occurred during the quarter and the number of machines sold during the company's first showcase on the Home Shopping Network. SodaStream will have another HSN showcase on October 27, 2012 which should prove to build upon its original HSN showcase. Lastly, our full quarterly preview report will have my projections for key metrics including machine and consumables sales, EPS and revenue expectations for the quarter.
Disclosure: I am long SODA.