With the stock down 45% in a year -- and 16% this past month -- expectations are about as low as they can get for SodaStream's (SODA) second-quarter report. Wall Street is bracing for a 25% sales drop and 19% lower profits from the at-home soda machine maker when it posts earnings results on Wednesday, Aug 5.
| Metric | 2014 Q2 | 2015 Q2* |
|---|---|---|
| Revenue | $141 million | $106 million |
| Profit | $0.42 per share | $0.35 per share |
*2015 Q2 is the average target of the nine Wall Street analysts who cover the stock. Source: Yahoo! Finance and SodaStream financial filings.
Running the business in reverse
Those expected brutal drops are mostly self-imposed because SodaStream is running its business in reverse right now. Management has slashed advertising spending, reduced its store footprint, and delivered fewer soda machines, carbon dioxide canisters, and flavors to the remaining retailers that still sell its products.
Source: SodaStream.
That's all in preparation for a massive strategic shift slated to roll out over the next few quarters. If all goes according to plan, the SodaStream brand will be shifted away from shrinking soda demand and toward a sparkling water product line that will reinvigorate sales growth. "We've made good progress preparing for the launch of a completely new portfolio of great tasting, better for you sparkling water flavors later this year that we believe will resonate strongly with our consumer audience," CEO Daniel Birnbaum told investors in May.
But this is about much more than product branding. SodaStream is also revamping its manufacturing base, replacing key management positions, and targeting big changes to the customer experience including home pickup of used carbon dioxide canisters. In short, the company isn't so much repositioning a product line as it is attempting to reinvent itself.
The huge scope of changes raises the stakes in terms of the level at which management will have to execute around an entirely new marketing, distribution, and product focus in the next few months. Investors won't know whether the company succeeded in this shift until it is underway. All we have to go on is management's belief, which it summed up like this in last quarter's conference call:
We are confident that repositioning our brand and message around health & wellness will resonate with a broader audience, helping reinvigorate demand for our entire product portfolio in these key markets and result in accelerated growth. -- Birnbaum
Two numbers to watch
While they wait for evidence that this relaunch succeeding -- or failing -- shareholders can focus on two metrics in this week's results. First, keep an eye on carbon dioxide refill sales. They actually improved last quarter, rising by 4% despite a 41% nosedive in flavor sales. SodaStream counts a record 6 million customers who regularly purchase refills. And as long as that figure keeps marching higher, it shows that the company has a big, loyal user base to build on.
Second, watch profitability. Gross profit margin should improve to over 50% due to manufacturing changes and the fact that carbon dioxide canisters are taking up a larger portion of sales. Lower marketing expenses should also push operating margin higher. These cuts helped SodaStream return to profitability in the critical U.S. market last quarter despite a 14% drop in soda machine sales. Investors can expect plenty of talk on Wednesday about management's rebound plans, but cost controls are one of the few improvements that we can see proof of in the second-quarter report.
