Monster Beverage (MNST) Lags on Q2 Earnings and Sales

Zacks

Monster Beverage Corporation MNST reported second-quarter 2015 results. The quarter marked a major transition period for Monster Beverage. With the closure of its deal with The Coca-Cola Company KO in June, the company has straightened out its new set of distribution rights and restructured its operating segments.

Per its deal with The Coca-Cola Company, which closed on Jun 12, Coca-Cola transferred ownership of its worldwide energy business to Monster, whereas Monster transferred its non-energy business to Coca-Cola.

Second-Quarter 2015 Details

Monster Beverage’s second-quarter 2015 adjusted earnings of 79 cents per share missed the Zacks Consensus Estimate of 90 cents by 12.2%. Earnings also decreased 3.7% year over year, owing to weak revenues, higher tax rates and an increase in diluted shares outstanding.

On Jun 12, 2015, Monster Beverage closed its deal with The Coca-Cola Company under which the latter acquired a 16.7% stake in Monster.

Second-quarter 2015 adjusted results exclude distributor termination costs and transaction expenses, related to the Coca-Cola Deal and gain realized on the sale of the non-energy business.

Revenues

Monster Beverage’s second-quarter 2015 net sales of $693.7 million lagged the Zacks Consensus Estimate of $753 million by 7.9%. Net sales however increased a mere 0.9% year over year.

Net sales were hurt by currency headwinds, low inventory levels maintained by the distributors due to changes in distribution rights and uncertainty of independent international distributors outside of The Coca-Cola network.

Foreign currency had an unfavorable impact of $23.9 million on net sales. Net sales outside the U.S. increased 2% year over year to $151.3 million in the quarter, particularly in Europe, the Middle East and Africa. However, sales in Spain, South Africa and Italy were impacted by the transition process of the deal closure.

Segment Details

From second-quarter 2015 onwards, Monster Beverage has reported its results under three operating and reportable segments. The three segments include Finished Products, Concentrate, and Other.

Finished Products: The Finished Products segment includes the former DSD segments excluding Peach Tea and Monster Energy drink products. The segment reported net sales of $651.2 million, up 1.2% year over year. Despite the year-over-year increase, net sales were hurt by unfavorable foreign currency.

Concentrate segment: The Concentrate segment includes brands acquired from TCCC. Net sales of the Concentrate segment were $13 million for the time period between the close of the deal and the end of the quarter.

Other segment: The Other segment includes the former warehouse segment and the Peach Tea brand. Net sales of the Other segment declined 32.6% to $29.5 million for the quarter.

Margins

Second-quarter 2015 adjusted gross margin rose 170 basis points (bps) to 56.9%, attributable to favorable changes in product sales mix, and a decrease in cost of some raw materials. Moreover, gross margin expansion was driven mostly by higher sales at the high-margin Concentrate segment.

Excluding deferred revenues and distributed termination expense, adjusted operating income increased 5% to $228.4 million. Operating margin was 32.9%, up 130 bps year over year.

Monster Beverage’s legal expenses during the quarter were $3.5 million, down from $4.9 million in the prior quarter.

Effective tax rate in the quarter was 37.3%, higher than 34.7% in the prior-year quarter, owing to reduction in some tax benefits.

Monster Beverage carries a Zacks Rank #2 (Buy).

Investors interested in the beverage industry can also consider Dr Pepper Snapple Group, Inc. DPS and Cott Corporation COT. Both companies carry a Zacks Rank #2.

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