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SodaStream (NASDAQ: SODA ) released preliminary full-year 2013 numbers prior to the recent ICR XChange Conference that sent the stock crashing. The company ran into some headwinds in the U.S. market along with currency fluctuations that affected sell-in prices and increased costs. The combination worked to smash the gross margin during the domestically important fourth quarter, but there are several reasons for investors to calm down and think long term.
The company clearly stated that it was working to implement measures to restore margins back to historical levels in the coming year. Normally, investors should be skeptical of such statements from management. The comments, however, were recently reinforced by a myriad of U.S. retailers, including Bed Bath & Beyond (NASDAQ: BBBY ) and Sears Holdings (NASDAQ: SHLD ) , that faced massive margin pressure during the holiday shopping season. Not to mention with revenue hitting the original target, SodaStream has the potential to benefit in the future from more soda-making machines in the market generating more consumable sales.
The news isn't all that bad, yet the stock spent last week cratering toward 52-week lows.
Focus on consumables
A general complaint in the past has been that SodaStream should sell the machines at cost or even below cost in order to get them in the hands of consumers. In the old razor-and-blades model, the soda machine maker would benefit from selling the flavors and highly profitable and patented CO2 refills to repeat users over and over. The preliminary fourth-quarter results suggest a general push in that direction, whether desired or not. The real focus of the final report should be whether the margin hit came on the machines only or also in consumables.
For the previously released third quarter, consumables had moved up to 55% of total revenue. A stronger consumable number in the fourth quarter would provide a bullish signal for the future.
Other retailers crushed
Important retailers, including a leading seller of SodaStream products, Bed Bath & Beyond, were hit this past holiday season by high levels of online sales partially encouraged by the weather and an overly promotional environment. The impact to Bed Bath and Beyond provides general comfort that it was a domestic retail issue... not a SodaStream-related issue.
Bed Bath & Beyond saw its stock slump $10 to close at less than $70 after issuing a warning for the holiday quarter. The retailer missed earnings by only $0.03 for the quarter ended in November. Combined with guidance for the current quarter that includes December, however, analysts have dropped full-year earnings estimates by $0.15 from the original estimate of $5.01.
Sears Holdings reported comp sales plunged 9% at Sears domestic stores and a slightly better 6% at Kmart stores that sell the SodaStream products. Considering those stores' performed worse than expected as a whole, investors need to factor in the weak selling environment into the long-term view of SodaStream.
Margin issues aside, SodaStream still hit revenue targets and generated 29% revenue growth for the year to reach $562 million. Investors who continue to think that making soda at home is a fad should review the growth in Western Europe, where the company has been operating for decades. In the third quarter, Western Europe revenue surged 43% to reach $75.5 million. With the Americas being the largest soda-drinking region in the world, the expectations remain that SodaStream sales in this region will eventually surpass those in Western Europe.
Based on the generally weak retail environment in the U.S., SodaStream investors need to refocus on the long-term benefits of selling more machines even at lower margins. When the company reports the more detailed full-year results in February, investors need to key in on the machine sales volumes and consumables margins. Also, a key point will be whether strong European sales were maintained, highlighting that the problem was only a domestic blip that can be corrected.
The stock remains ultra-cheap for a revolutionary product that is step-by-step changing the soda business. With the still fast-growing concept trading at roughly 1.5 times revenue, it provides an extreme value.
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