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Is SodaStream Losing Its Flavor?

Rick Munarriz
October 30, 2013

SodaStream (NASDAQ: SODA) opened lower this morning after posting financial results that were light on fizz.

The company that's been championing the home-carbonation market with its namesake soda maker had no problem posting record top-line results. SodaStream's revenue for the third quarter soared 29%, to $144.6 million, just shy of the $145.2 million that Wall Street was targeting. Earnings slipped from $0.80 a share to $0.76 a share, but that was actually ahead of the $0.72 a share that analysts were expecting. 

Don't let the bottom-line slide concern you. Yes, SodaStream's margins contracted during the period as it ramps up its marketing campaigns and invests in growth by building up its infrastructure, as well as acquiring a few regional distributors. However, the only reason that net income slipped is because there was a one-time tax benefit last time around. Operating income actually moved 10% higher during the period. 

It's easy to spot the weakness by sifting through the performance of SodaStream's three product categories. Sales of soda maker starter kits rose 27% during the quarter, and that's encouraging for future growth as buyers return to buy the higher-margin consumables after their starter kits run dry. The 34% spike in CO2 refills proves that these systems aren't collecting dust in the attic. Folks are loading up on the carbonators that provide the fizz to flat water.

Then we get to the mere 7% increase in flavors. In an ideal world, flavor bottles would be selling as briskly as the CO2 canisters. Naturally, we know that this is not the case. A lot of people buy SodaStream to make sparkling water that they enjoy on their own, or use as seltzer for heartier libations. SodaStream is cool with that. It makes a healthy profit on the carbonation itself. However, Sodastream would also love to sell you the flavors.

SodaStream knows that the syrups are important, and that's why it has teamed up with beverage heavyweights to make it happen. It teamed up with Kraft Foods to offer Crystal Light diet drinks and Country Time lemonade as flavors for its carbonated product. It then kicked things up a notch by turning to soup giant Campbell Soup to provide V8 Splash and V-Fusion beverage flavors for SodaStream systems.

However, the trend is still moving away from SodaStream flavors. A quarter earlier, we had a 31% increase in CO2 refills, accompanied by an 18% uptick in flavors. The quarter before that it was a healthy 34% year-over-year surge in flavors, though that particular uptick could be a seasonal thing as folks who received SodaStream as a holiday gift last December hit stores in January to buy their favorite flavors. And, no, it's not a seasonal lull this time around. SodaStream experienced a 76% pop -- no pun intended -- in flavor unit sales during las