Monster Beverage (MNST 0.24%) has fixed a few of the issues that were harming its business in late 2021. The company said in its recent first-quarter earnings report that it has rebuilt inventory, reduced the need for expensive air freight, and secured enough inputs like aluminum cans to meet rising demand for its energy drinks.
But that demand spike is about to be tested by an upcoming price increase scheduled for early September. And, given the significant drop in profitability that Monster has reported over the last few quarters, that price boost might be significant.
Let's dive right in.
Image source: Getty Images.
Meeting the demand
While best-known for its energy drinks, Monster Beverage also makes and sells a host of other drinks, including tea, lemonade, coffee drinks, fruit juices, soda, and more. The California-based company reported mostly good news for the selling period that ended in late March. Sales grew 22%, marking a modest acceleration compared to the prior quarter.
Better yet, many of the challenges that management highlighted back in late February were fixed over the last few months. Monster has secured enough aluminum cans to reduce the need to pay up for costly imported materials. It is in a better inventory position, too, which won't require the expensive air-freight distribution that pinched earnings in late 2021.
The company is meeting demand right now in a way that it couldn't last quarter. "The global energy drink category continues its growth trend," CEO Rodney Sacks said in a press release. "And we remain well placed to capitalize on this growth."
The case for a price increase
The bad news is that costs are still spiking. Monster paid more for freight, for manufacturing inputs, and for labor. Gross profit margin fell to 51.1% of sales from 57.5% a year ago. Operating costs expanded at a faster rate than sales, too, so that operating income actually fell to $400 million (26.3% of sales) from $414 million (33.3% of sales) despite the 22% sales spike.
Monster reported that while some of these cost challenges are temporary, others aren't. That's why the company plans a price hike for the core U.S. market on Sept. 1.
Peers have already increased their prices to reflect rising expenses. Price hikes were a big part of the rising sales figures that both Coca-Cola and PepsiCo recently reported.
Investors will know whether consumers are taking Monster's boost in stride by following sales volumes over the next few quarters for signs that growth is coming from both higher prices and increased volume. But they'll have to wait until late 2022 for the answer to that key question.
