SodaStream International Ltd. SODA reported adjusted earnings (excluding restructuring costs) of 17 cents per share in the second quarter of 2015, which missed the Zacks Consensus Estimate of 37 cents by a massive 54.1%. Earnings plunged 60.5% year over year due to weak sales and margins.
Adjusted earnings of the Israel-based manufacturer of household soda machines exclude restructuring costs related to the growth plan, including which, earnings came in at 5 cents, much less than 43 cents a year ago.
Revenues Remain Weak
Total revenue was $99.8 million which missed the Zacks Consensus Estimate of $108 million by 7.6% and declined 29% year over year. Currency headwinds, due to the weakening of many foreign currencies against the U.S. dollar, had a negative impact of around $16.9 million on sales. Lower demand for its products, mainly in the U.S. and France, also hurt sales. Revenues declined in all the four geographical regions.
SodaStream’s Americas’ revenues, which comprise 23% of its global sales, went down 44% due to weak demand and difficult year-ago comparisons.
The Zacks Rank #5 (Strong Sell) company has been facing soft sales in the U.S. over the past few quarters due to low demand for its products — soda/sparkling water machines and flavored syrups. SodaStream’s products are primarily sold at major retail stores like Kohl’s, Corp. KSS, Macy’s, Inc. M and Bed Bath & Beyond, Inc. BBBY.
The U.S. carbonated soft drink (CSD) market is facing troubles as consumers are shifting away from traditional soda toward more natural, water-based beverages with fewer calories.
SodaStream is thus pursuing a global restructuring and growth plan. It is repositioning itself as a water brand behind a health and wellness strategy and making significant changes in its growth strategies to turn around the business. Management had previously communicated that the first-half results would be challenging due to the ongoing transition.
As part of its restructuring and growth plan, the company has begun to roll out a range of natural water-enhanced flavors at its retailers. The company is also testing a new marketing campaign — “Sparkling Waters – Made by You”.
Also, the company is working to transform its manufacturing base and operating structure — including consolidation/closure of production facilities — to create a more efficient organization.
In addition, lower advertising and promotional activities and rationalization of distribution in the quarter pulled down sales. SodaStream is holding back marketing expenses in the U.S. ahead of the product launches scheduled in the latter half of the year.
Sales declined 16% in Western Europe due to currency headwinds and lower demand in France which offset higher sales in Germany, Austria, Norway and Switzerland. In Asia-Pacific, revenues declined 26% due to currency headwinds and soft performance in Korea which offset higher sales in Japan and Australia. Finally, in Central & Eastern Europe, Middle East, Africa (CCEMA), sales plunged 58%.
Volumes of sparkling water maker starter kits fell 37% year over year, while flavor units plunged 45%. Carbon dioxide (CO2) refill sales, however, rose 7%, an all-time high.
Margins Weak
Gross margins declined 20 basis points (bps) year over year and 200 bps sequentially to 52.3% as a favorable product mix due to higher proportion of CO2 refills was offset by currency headwinds.
However, operating margins declined 350 bps mainly as lower advertising and operating costs were offset by weak revenues and currency headwinds. Negative currency impact hurt second-quarter operating income by $4.5 million.
Second-Half Outlook
Management expects sales decline rates to moderate in the second half, especially in the fourth quarter. Sales growth is likely to turn positive in the fourth quarter.Gross margins are expected to be down slightly in the third and fourth quarters versus the comparable year–ago periods, due to unfavorable product mix (higher concentration of sparkling water makers and flavors). Advertising costs are expected to shoot up in the second half, especially in the third quarter, to support the product launches. For the full year, A&P, as a percentage of revenues, is expected to be approximately 15%.
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