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  • SodaStream (SODA) - Making Green Mountain (GMCR) Look Squeaky Clean 5 comments
    Oct 30, 2013 12:53 PM | about stocks: SODA

    Several months ago, we shared our opinion that SODA was buying its Italian distributor to provide a revenue and EBITDA boost through accounting shenanigans. Simplistically, SODA previously made sales into its channel, recognizing revenue. Then, they bought the distributor, assumed the inventory, and could re-sell the product, effectively recognizing sales two times on the same product. We believe this accounting treatment was the same methodology used in the past when SODA bought its Nordic distributor. Recall, on its Q2'13 earnings call, when management casually announced they had bought their Italian distributor, the company guided for a minimal impact from the transaction. To be precise, SODA guided for the transaction to add "$2 million" of sales in the second half of 2013. Also, they confessed (or blamed) that they had assumed $10 million of Italian inventory from the distributor they acquired. See below (emphasis added):

    Q2'13 Call from 7/31/13

    Jim Chartier: Good morning. The first question, how much did the acquisition of Italy add to your outlook for 2013 revenues?

    Daniel Erdreich (NASDAQ:CFO): Yeah, it won't be that significant, it will be a couple of millions on top line and there won't be any impact on bottom line.


    Jon R. Andersen: Can I just confirm, on the Italian - the acquisition of the Italian distributor, your expectation is that will add about $2 million in the second half of the year to sales, no impact on the bottom line, and kind of $4 million on an annual run rate basis, is that the right way to think about that?

    Daniel Erdreich (CFO): That's right, Jon.


    Scott Van Winkle: Hi, thanks, good quarter. Most of my questions have been asked, but just a couple follow-ups. On net inventory, I think you talked about Italy maybe selling through some inventory, having to work through is it; is that referring to the $10 million of inventory you took on with the acquisition or more in store?

    Daniel Erdreich (CFO): No it's - the $10 million that was taken as inventory is the increase, is the main item of increase in inventory that we see in the account.


    As we pondered after the Q2'13 call - SodaStream had already recognized revenue on its sales into the Italian distributor, hence they could double count the revenue based on the purchase accounting methodology. If SODA was assuming $10 million of inventory, then presumably that was $21.7 million of prior sales SODA had recognized into this distributor (assumingcthe corporate gross margin of 54%). Therefore, future sales of this newly assumed inventory would effectively create a double-counting effect on revenue.

    SodaStream just reported its Q3'13 earnings and concluded its conference call. The stock is down about 6%, but will likely be down significantly more as investors and analyst digest the slew of issues. We do not believe the shenanigans we identified are understood, nor even responsible for any portion of the sell-off. Not yet at least. The stock is likely down because:

    • they missed the top line
    • missed Americas sales by a wide margin (with growth decelerating to sub-30% after growing 88% last year and over 65% in the first half)
    • flavor sales collapsed to only 7% growth year-over-year, while Americas saw flavor sales decline year-over-year
    • APAC declined by 21% year-over-year
    • DSO's jumped to 86
    • And inventory was up 43% year-over-year despite sales growth that slowed to 28.5%
    • And for the first time in many quarters, they were unable to raise guidance

    The lone bright spot appeared to be Western Europe, its largest region, which inexplicably experienced year-over-year accelerating growth. The region grew 43% year-over-year, which was a huge jump from the 21.6% reported in the first half. This, despite deceleration and/or declines in every other geography. We believe that the "surprising" growth in Western Europe can be attributed to its Italian distributor. Further, our analysis, which could of course be wrong, leads us to believe management has completely understated the Italian contribution. This acquisition alone appears responsible for the accelerating growth.

    On the Q3'13 quarterly call, the CFO unequivocally stated that part of the inventory jump year-over-year was due to $6 million of remaining Italian inventory. Based on the $10 million of initial Italian inventory disclosed on the Q2'13 call, we can conclude that $4 million of inventory was sold in Q3'13 (10-6=4). If we assume a gross margin inline with the corporate average, the $4 million of inventory that was sold would have resulted in $8.7 million of revenue contribution during Q3'13. Recall, management said on its Q2'13 call the Italian distributor sales would only contribute "$2 million" in the entire second half. This appears to be rather inaccurate.

    Turning back to the confounding acceleration in Western Europe growth, we believe net of our calculated Italian distributor contribution, revenue growth was inline. Western Europe delivered $75.5 million of revenue vs. $52.6 million in Q3'12. However, if we reduce the Q3'13 revenue by our estimation of the Italian distributor contribution of $8.7 million, then Western Europe would have delivered growth of 27% ($66.8 million vs. $52.6 million YoY). This still represents respectable growth, but would have turned a small overall miss in Q3'13 into a much more problematic miss.

    We continue to believe that SodaStream is playing extremely loose and fast with its numbers and communication. We also think they will be unable to grow significantly in 2014 without major door expansion OR by accounting shenanigans through another distributor acquisition. Should SodaStream buy another distributor, specifically its Japanese distributor, who as recently as last quarter SodaStream was putting more marketing muscle behind, then we think it will validate our concern SodaStream is "re-buying" revenue only to "re-recognize" it all over again. While investors, and especially sell-side analysts, will continue to hang on to the 2017 growth goals the company laid out at its analyst days, the cracks are showing. We look forward to hearing an explanation for the accounting inconsistencies around inventory and its Italian distributor appearing to be a far larger contributor than management has insinuated. However, we'll have to wait until the 20F to get an honest answer because the company does not file quarterly reports and we definitely don't trust the company's explanations.

    Disclosure: I am short SODA.

    Stocks: SODA
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Comments (5)
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  • ibrowning85
    , contributor
    Comments (17) | Send Message
    From the conference call:


    "Daniel Birnbaum - CEO
    One unusual situation is Italy. You remember the transition into Italy. Right now we’re selling inventory that we acquired from the distributor and we’re not taking full margin on that inventory. We are only taking the portion so that we don’t double account profit; we are only taking the margin on that inventory which is the distributor margin."


    You conveniently left this major point out of your "analysis".
    30 Oct 2013, 05:40 PM Reply Like
  • dgr25422
    , contributor
    Comments (2) | Send Message
    ha...apparently we were thinking the same thing Ibrowning...
    30 Oct 2013, 10:02 PM Reply Like
  • dgr25422
    , contributor
    Comments (2) | Send Message
    Straight from the transcript liar:


    Daniel Birnbaum - CEO
    One unusual situation is Italy. You remember the transition into Italy. Right now we’re selling inventory that we acquired from the distributor and we’re not taking full margin on that inventory. We are only taking the portion so that we don’t double account profit; we are only taking the margin on that inventory which is the distributor margin.
    30 Oct 2013, 05:42 PM Reply Like
  • Hubert MATHET
    , contributor
    Comments (11) | Send Message
    When you dare posting that type of comment, the least you can do is to make sure you understand accounting.


    First of all, what's wrong with selling the inventories SODA bought back from the Italian distributor? Nothing in my view. SODA has bought a ready to sell inventory which, if sold by the distributor to retailers (assuming an ongoing relationship), would have triggered more orders from the Italian distributor to SODA. So the only distortion at SODA's revenues level is the pocketed distributor's margin .
    The trick, if there is any, is the discount at which the inventory price was negotiated between SODA and its former distributor. And so far, you cannot be more precise about what those 10 m$ are really representing. It's a book value which means the cash actually paid by SODA to purchase what was left at the distributor's. That does not mean the distributor bought it for 21.7 m$. If no discount was negociated between the parties, then it was worth 4.6 m$ of SODA's stock which were sold 10 m$ to the Italian distributor. Full stop.


    Now getting to your argument about the window dressing with regards to the Q3 2013 European sales. Again, you are assuming that when taking over the Italian distributor, SODA paid for the inventory its own sell out price. If you do have the proof of that, I'm ready to reconsider my position.
    30 Oct 2013, 05:43 PM Reply Like
  • Hubert MATHET
    , contributor
    Comments (11) | Send Message
    I just got the company to confirm that the 10 m$ were exactly the price paid by the distributor when he initally purchased the inventory from Soda. So there is no gimmick of any kind here and Mr Copperfield, you'd better consider that accounting is neither magic nor esoteric. It's simple math.
    31 Oct 2013, 07:43 AM Reply Like
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