We knew that this would be a rough morning for SodaStream (SODA). The leader of consumer carbonation machines warned last month that it would barely break even during the holiday quarter on roughly 26% in top-line growth, and it pretty much lived up to its hosed-down guidance.
Revenue in its latest quarter rose 26% to $168.1 million, and earnings fell sharply to $0.03 a share from $0.36 a share from the prior year's fourth quarter. Analysts were only holding out for a profit of $0.01 a share on $167.3 million, but only an apologist would classify this as a beat. History may show that SodaStream landed ahead of analyst profit targets every single quarter in 2013, but this one deserves a meaty asterisk after last month's dramatically revised outlook.
What clobbered margins? Half of the shortfall is explained by the budding pop star marking down its starter kits. Retailers demanded markdowns as the holiday season grew more competitive and SodaStream complied under the assumption that household penetration reigns supreme. It also shifted distribution to lower-margin outlets. It sold 40,000 soda makers through HSN in a single day, taking a hit on margins but hoping to make it up in time through higher-margin consumables.
Another problem is that SodaStream underestimated retail demand, particularly in the U.S., and that led to hefty reconfiguration costs. There were 20,000 unsold starter kits moved from the U.S. to Canada, and that involves new instructions, packaging, and some components. Another 100,000 systems shifted from traditional retailers to direct distributors like the HSN deal. Finally, 450,000 systems were reconfigured as Mega Packs, which sold well in some countries but fell flat in others.
The good news is that the consumables held up well during the period. CO2 refill units rose 25% and flavor units spiked 32%. Consumables revenue grew 35% overall, implying higher selling prices. That's a contrast to the actual soda makers, which spiked 39% in units sold but only 18% in revenue. It's still a solid showing that proves that these systems aren't collecting dust. They're being used. Flavors were a concern during the third quarter as unit sales increased by just 7% globally and actually declined slightly stateside.
SodaStream also addressed the 800-pound carbonated gorilla in the room, discussing this month's move by Coca-Cola (KO -0.05%) to buy a 10% stake in Green Mountain Coffee Roasters (GMCR.DL). Green Mountain will be putting out an in-home carbonation rival to SodaStream in its next fiscal year, and Coca-Cola is now a vested partner in Keurig Cold and will be making its flavors available for Green Mountain's appliance.
SodaStream CEO Daniel Birnbaum initially called it "further validation" of the disruptive industry, and said that there's "a lot of runway" for several players to excel. Later on, when pressed for why Coke chose Green Mountain over SodaStream, Birnbaum was less diplomatic.
"Everyone has a right to make a mistake," he said.
Investors in SodaStream may feel the same way in recent months given the stock's cascading ways, and SodaStream's new guidance for 2014 seems unflattering at first glance. It sees revenue growing 15%, just shy of the 17% that analysts were targeting. It also sees earnings climbing a mere 3% to what would be roughly $2 a share, well short of the $2.35 a share that the pros were expecting. But EBITDA excluding foreign currency exchange rates should clock in at an encouraging 25% growth rate. Keep in mind that this growth is stacked against all of 2013, not just the soft fourth quarter.
Things could be better. But given a rough holiday quarter and what should be another challenging first quarter on the bottom line as it works through its challenges, it's not a bad place for it to be as the market leader growing its popularity in the double digits.