SodaStream Q1 Earnings Trump Ests; U.S. Remains Weak - Analyst Blog

SodaStream International Ltd.'sSODA first-quarter 2014 earnings of 8 cents per share beat the Zacks Consensus Estimate of 2 cents by 300%.

Earnings of the Israel-based manufacturer of household soda machines, however, declined around 86% year over year due to soft U.S. sales, currency headwinds, and higher advertising and promotional expenses.

The earnings per share result included share-based payments.

Revenues were Soft

Total revenue of $118.2 million increased 0.5% year over year but were almost in line with the Zacks Consensus Estimate of $118 million as robust international sales were offset by challenges in the U.S., which accounts for about 30% of SodaStream's revenues.

Geographically, revenues decreased 28% in the Americas but increased 17% in Western Europe, 28% in Asia/Pacific and 34% in Central and Eastern Europe, Middle East and Africa (CEEMEA).

Sales were weak in the Americas due to elevated inventory levels at retail customers due to weak holiday sellout last quarter. SodaStream's products are primarily sold at huge retail stores like Kohl's, Corp. KSS, Macy's, Inc. M and Bed Bath & Beyond, Inc. BBBY. Also, difficult year-ago comparisons hurt sales in the reported quarter.

Management is looking to reinvigorate the U.S. business with a focus on reaccelerating soda maker growth by improving marketing execution and increasing retail presence.

The better-than-expected performance in Western Europe was driven by strong gains in several markets, especially Germany. In Asia Pacific, strong gains in Australia offset weakness in Japan. Improvement in Czech Republic and strong performance in Israel led to the improvement in CEEMEA.

Among the product categories, soda maker sales declined around 11%, consumables (like gas refills and flavors) increased 11% and other product sales increased 0.4%. In fact, U.S. soda maker sales declined 69% in the quarter as weak holiday sales left retailers with excess inventory in the first quarter.

Margins Decline Again

Gross margins declined 220 basis points (bps) year over year to 52.3%. An unfavorable product mix due to increased share of lower margin soda makers and currency headwinds hurt gross margin performance.

The sales and marketing (S&M) expense ratio increased 600 bps in the quarter to 39% due to higher promotional and advertising expense as a percent of revenues. Higher advertising/promotional expenses in the Americas and increased marketing investments in Europe pulled up the advertising and promotion expense ratio to 18.1% in the quarter from 13.5% last year.

General and administrative expense ratio also grew 140 bps in the quarter to 11.3% of revenues due to additional distribution costs and infrastructure investments.

Adjusted operating margin declined 960 bps year over year to 2.0% due to weak gross margins and higher costs.

2014 Outlook Retained

Management re-affirmed the previously provided financial guidance for 2014. However, it now expects Western Europe to grow slightly faster than expected earlier and the Americas slightly slower.

Full-year 2014 revenues are expected to increase approximately 15% over 2013 revenues of $562.7 million. Gross margin is expected to be approximately 51%, flat with the 2013 levels.

2014 EBITDA is expected to increase approximately 11% year over year. Excluding currency headwinds, EBITDA should grow 25%. Tax rate is expected to be 12%, higher than 10% in 2013.

Full-year 2014 net income is expected to increase approximately 3% year over year.

Second Quarter Outlook

In the second quarter, management expects revenues to increase in a mid single-digit range as soda maker sell-in will continue to remain under pressure, though to a lesser extent than the first quarter.

Last month, the Zacks Rank #4 (Sell) stock made headlines after an Israeli news website stated that the company was in talks to sell as much as 16% stake to a big buyer. Speculation was that the partner will be a big beverage maker, allowing SodaStream to compete more effectively in this ultra-competitive space. The Israeli website noted that SodaStream was in talks with Pepsi, Dr Pepper Snapple or Starbucks.

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