Monster Beverage (MNST) Beats on Q2 Earnings, Misses Sales

Monster Beverage Corporation's MNST second-quarter 2014 adjusted earnings of 81 cents per share surpassed the Zacks Consensus Estimate of 76 cents by 6.6%. In addition, earnings increased 31.5% year over year on the back of solid margins, better cost leverage, and a lower tax rate.

Revenues

Monster Beverage's second-quarter 2014 net sales of $687.2 million lagged the Zacks Consensus Estimate of $698 million by 1.5%.

Revenues were affected by softer growth rates in the Energy category in both the U.S and international markets. In addition, revenues continued to be eroded by cannibalization of sales of existing brands like Absolutely Zero and Lo-Carb by new products such as Ultra and Muscle Monster products.

However, net sales rose 8.9% year over year driven by higher sales of new products like Ultra and Monster Original Green energy drink. Some of the brands that did well in the quarter include Java Monster, strawberry and peanut butter cup Muscle Monster energy drinks and Peace Tea Line.

Net sales of the Direct Store Delivery (DSD) segment increased 9.8% to $660.1 million due to higher sales volumes of Monster Energy drinks.

Net sales of the Warehouse segment decreased 9.5% to $27.1 million due to lower sales of Hubert's Lemonades.

Gross sales outside the U.S. increased 12.3% year over year to $180.2 million in the quarter. The company witnessed a 14.6% increase in sales in Europe, the Middle East and Africa.

Margins

Second-quarter 2014 gross margin rose 190 basis points (bps) to 55.2% attributable to a decrease in cost of goods, particularly sweetener, increased sale of the Ultra line and a decline in allowances.

Operating income increased 20.3% to $215.8 million owing to higher operating profit from international operations such as the Europe, Middle East and Africa regions.  Operating margin was 31.4%, up 300 bps year over year, on the back of solid revenue, partially offset by higher professional service cost.

Monster Beverage has been involved in several controversies. The Food and Drug Administration is currently investigating the impact of caffeine in food and dietary supplements, which includes Monster Beverage's products. All these regulatory and litigation issues are increasing the company's professional service cost. Monster Beverage's legal expenses during the quarter were $7.9 million, up from $5.0 million in the prior quarter.

As a percentage of revenue, distribution costs decreased 10 bps to 4.4% while selling expenses declined 110 bps to 10.5%. The company benefited from a decline in premiums, point of sale and other marketing expenses.

Effective tax rate in the quarter was 34.7%, lower than 39.3% in the prior-year quarter, owing to profits earned in foreign subsidiaries.

Financial Update

The company ended the quarter with cash and cash equivalents of $373.1 million as of Jun 30, 2014, compared with $312.0 million as of Mar 31, 2014. During the second quarter of 2014, the company did not repurchase any shares under its existing share repurchase program.
 
Monster Beverage carries a Zacks Rank #4 (Sell).

Key Picks from the Sector

Better-ranked stocks in the consumer goods industry include The WhiteWave Foods Company WWAV, Pepsico, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS. All the three companies carry a Zacks Rank #2 (Buy).