Time to Spit Out Jones Soda?

There was little reason to expect Jones Soda (Nasdaq: JSDA) to deliver a solid quarterly report last night. The edgy soft-drink maker's CEO stepped down toward the end of the period, and Jones Soda had missed analyst expectations in each of the first three quarters of 2007.

Unfortunately, even investors who were braced for bad news couldn't have fathomed the horrendous fourth-quarter report.

Net revenue fell by 41%, to $5.9 million, mostly as a result of slotting fees (the sums paid to retailers in exchange for shelf space) and promotional allowances related to the company's questionable entry into the canned soft-drink market.

It's ugly even if you ignore the slotting ransoms. Gross revenue fell by 6%, to $9.7 million. That's a shock, because the company entered several once-promising platforms, like selling canned soda in locations other than Target (NYSE: TGT), and started its run as the exclusive soft-drink provider at Seattle Seahawks home games last year. These were supposed to be incremental revenue streams. How could gross revenue go backward?

Can it be? Are the canned Jones sodas cannibalizing the premium bottled flavors while cheapening the brand?

The journey didn't get any fizzier on the way to the bottom line, where a $0.08-a-share profit a year ago was butchered into a loss of $0.39 a share. Several factors are baked into the steep loss, including severance charges, a valuation-allowance accounting hit, and costs to pay for its canned mistakes, including the elimination of poor-selling flavors, specialty packs, and 16-ounce cans.

Yes, if you needed confirmation that Jones Soda isn't the next Hansen Natural (Nasdaq: HANS), you can see it in the failure of the 16-ounce cans -- the size that championed Hansen's Monster energy drink into the retail market.

Bottom of the bottle
Jones Soda has naturally been a painful recommendation for the Rule Breakers newsletter. The fourth quarter was a disaster, but on the upside, a fundamentals crater this deep feels like the bottom.

Jones Soda stepped out of form last night, issuing guidance for the year ahead. It sees net revenue growing by 20% to 25% in 2008. Gross margin will return to historical levels, instead of last year's hysterical levels. The company expects to post a loss for the year before returning to profitability come 2009.

There have been a few encouraging signs since the start of 2008, including the recent move by Whole Foods Market (Nasdaq: WFMI) to stock Jones Soda's 24c vitamin-water powder packets, and canned soft-drink distribution on Alaska Air (NYSE: ALK) flights.

The company is also rolling out its sugarcane-sweetened cola line nationally. Yes, Jones Soda has rarely had to bank on the basics. In the past, the company's more colorful and eclectic bottled flavors have won over unlikely retailers like Zumiez (Nasdaq: ZUMZ) and Panera (Nasdaq: PNRA).

However, now that Jones has to offer the standard cola and lemon-lime staples at NFL games, it makes perfect sense to see whether it can establish those flavors as a way to jam its foot into more venues and beverage outlets.

The rollout of cola and Splenda-sweetened diet cola will feature giveaways and customer loyalty programs -- the kind of stuff the big boys do all the time. I guess that's the price you pay for going corporate.

They call him Mr. Jones
OK, so maybe Jones Soda hasn't really gone corporate. You can't go corporate when your income statement looks as amateurish as the one that the fledgling pop star just produced.

Jones hopes to keep its street cred going by ramping up its online presence through ventures like the new MyJonesVideo.com video-sharing site; it's already up, but it'll officially launch in a few weeks.

So what's an investor do to? Most of the near-term catalysts have gone AWOL. Jones Soda is an unlikely acquisition target until it starts growing again. Profits won't be back this year. The Seahawks came and went without a material impact on sales. Even the CEO search -- which generated a temporary spike -- has been suspended, with the interim CEO sticking around.

The hope at this point is that 24c can become another workhorse for Jones. The company also needs to restore its premium positioning. The biggest challenge will come with its cans. The packaging lacks the pizzazz that Jones Soda has been able to accomplish via the user-submitted photo labels that appear on its see-through glass bottles.

Then again, Jones Soda hasn't been able to see through much of anything lately.