Celsius Holdings' (CELH -0.04%) financial update this week was a bit more flat than fizzy. The marketer of a popular line of "functional energy" beverages saw its fourth-quarter revenue climb by 71% to $178 million. True, most consumer-facing companies would love to post that kind of growth, but analysts had been targeting a 72% increase heading into Wednesday afternoon's report.
The bottom line was also a letdown at first glance. A reported loss of $28.2 million -- or $0.37 a share -- reversed a year-ago profit. Wall Street's consensus expectation had been for a net loss of just $0.10 a share.
Celsius shares rose 40% in 2022, a year during which many growth stocks got knocked down. The stock is trading lower in 2023, just as many out-of-favor growth stocks are bouncing back. This week's uninspiring report may not make Celsius look as sparkling as its line of calorie-burning canned drinks, but there were some bright spots in it that are worth shining a light on.
1. Even the red ink is functional
Celsius did post a larger-than-projected loss of $28.2 million for the final three months of 2022, but that's not as bad as you might think. The company took a $37.6 million hit for the recognition of termination expenses related to the end of its deal with its prior distributor. Back out the one-time expense, and Celsius could've turned a profit.
This followed a much larger hit of $156 million it took during the third quarter, also related to distributor termination expenses. So why is the company going through all of this expensive hassle?
Celsius shares popped last summer after PepsiCo (PEP 3.62%) invested $550 million in the functional beverage specialist. The beverage giant received convertible preferred stock equal to an 8.5% stake in it, and also agreed to become the primary distributor for Celsius in the U.S. and its preferred partner overseas. The $194 million in distribution termination expenses over the past two quarters essentially complete the transition that took place late last year.
The PepsiCo deal is already paying off, by the way. During the earnings call, management pointed out how Celsius has been able to expand its presence with PepsiCo customers, including the Marriott (MAR 1.82%) and Hilton (HLT 3.89%) hotel chains and many new airport and casino locations.
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The PepsiCo deal could also help explain why its revenue fell just shy of market expectations. Celsius' blowout third quarter included $15 million to $20 million in revenue booked as it built up inventory at PepsiCo warehouses and distribution centers ahead of the transition that officially kicked off at the start of the fourth quarter. In short, its revenue was somewhat inflated in the third quarter at the expense of the fourth quarter.
To be fair, analysts knew this. It was discussed during the third-quarter earnings call. However, it's human nature to aim higher after you're humbled, as Wall Street pros were after modeling for Celsius to deliver a 71% top-line increase in the third quarter, when it instead nearly doubled its business with a 98% revenue pop. So expectations were high this time around.
2. International sales are growing again
The most amazing thing about the headier growth that Celsius posted through 2021 and earlier in 2022 is that its North American sales were growing even faster than total sales. Celsius was seeing its business contract internationally due to a number of factors -- but PepsiCo could make a big difference in making the smaller brand a global player.
Celsius' international sales rose 38% in the fourth quarter. The overseas business held back the 74% top-line surge in North America, but it's finally moving in the right direction. International revenue declined by 16% through the first nine months of the year.
Celsius sees "significant opportunities" for international growth with PepsiCo as a partner. The stateside transition has been the primary focus, but it has started to have discussions about global opportunities. Management expects to announce additional international expansion moves in the future.
3. Margins are improving
Revenue growth decelerated in the fourth quarter, but gross margin continues to widen. Celsius' gross profit rose by 90%, improving by 445 basis points over the prior-year period. Management credits that gain to lower average can prices, freight lanes improvements, and the shift to PepsiCo as its primary distributor.
Celsius could be just scratching the surface here. It expects its margins will improve sequentially as it scales its business and embraces better practices. With the one-time hits related to the PepsiCo transition now fading in the rear-view mirror, this top-line growth story among beverage stocks could start turning heads for its bottom-line growth in 2023
