Despite SodaStream's (NASDAQ:SODA) bold tie-up with the sultry Scarlett Johansson in January, this company has been anything but hot in 2014. Shares of the bubbly drink maker have lost 30% of their value year to date, while the S&P 500's up 7%.
But the stock price alone doesn't tell the whole story. There are a ton of moving parts under the hood of this company, and management commented on nearly all of them after reporting second-quarter earnings. Here are the top five insights from SodaStream's latest conference call:
The rest of the world is buying a SodaStream; the U.S. is not
This is becoming old news: For nearly a year, SodaStream has been struggling to sell its core product in the all-important U.S. market. The latest quarter was no exception. Soda machine sales were down 55% year over year in America, but up 4% outside of the U.S. What gives?
According to SodaStream's manager of the America's region, Scott Guthrie, the divergence in sales is due to a scattershot marketing campaign in the U.S., which contrasts with more focused messaging in other regions:
Our system offers several consumer benefits such as value, convenience, empowerment, environment, and health and wellness. ... We believe at this point in our life cycle that we must [home] in on the most compelling consumer benefit ... What we found is that health and wellness is top of mind with consumers. And it's clearly the leading megatrend in the U.S. when it comes to carbonated beverages.
Apparently, this type of resolute focus has worked in other countries. Germans, for example, love SodaStream due to its convenience, according to management -- they don't like "schlepping" bottles around. In Finland, folks appreciate the environmental benefits. Household penetration in Finland is north of 20% and Germany's year-over-year growth has reached 20% or more for four straight quarters.
Management's hoping the pivot to health and wellness will help SodaStream crack the code on American consumers.
The Wal-Mart relationship and price-slashing strategy fell short
Going into the second quarter, SodaStream had high expectations for a relationship with the world's largest retailer: Wal-Mart. By placing its products on prime shelf locations in stores and slashing prices, management believed it would stimulate demand and thereby boost brand awareness in the U.S.
This strategy wasn't a complete flop, but it didn't help SodaStream gain much traction either. Sales went up where product displays were installed, but that didn't really carry over to other retailers. In the words of Guthrie:
While the launch of our seasonal hot spots in approximately 1,500 Walmart doors contributed positively to our second-quarter results, they were not as impactful as we planned. At the same time, our demand creation efforts did not fuel sell-through across the remainder of our retail network to the extent that we had anticipated ... Our recent demand creation efforts have focused on value and that message has clearly not resonated with consumers.
New products could reignite SodaStream in the months to come
SodaStream pointed out a few products and initiatives that could provide a catalyst for sales in the U.S. First off, as discussed above, the company will double down on marketing its soda maker's health and wellness benefits.
Second, SodaStream is reducing the number of machines available and focusing on the launch of its Play machine in particular. The Play will be cheaper than the Source machine and provide a few key benefits, including silent valves that reduce noise, an auto lift mechanism, and a snap-lock bottle. Along with its flavor caps, SodaStream is trying to make the process of making at-home soda as simple and convenient as possible ahead of the launch of competing machines like the Keurig Cold.
Finally, it's trying to differentiate itself further from the competition by introducing low-calorie flavors like the SodaStream Free line, which has half the calories of Coca-Cola's original soda. Management is particularly excited about Free, as evidenced by Guthrie's comments on the early launch of this product in Europe:
The consumer's response has been extremely encouraging. In Finland, Free now represents approximately 20% of our flavored sell-through volume after only eight weeks at retail, which bodes extremely well as we get set to launch Free in the U.S. during the back half of the year.
A new factory promises to improve its supply chain
Back in the fourth quarter of 2013, inventory buildup was a critical issue for SodaStream, but management has effectively moved its product to the right places and resolved this issue. Furthermore, a new factory in Israel is up and running and should make for a more efficient and reliable supply chain, as outlined by CFO Danny Erdreich:
The first benefit of this factory is that it will bring plastics injection molding in-house. ... [W]e'll be saving tons of transportation between factories and between locations. So we estimated in the past that this will provide us at least 200 basis points additional gross margin and at this stage, this is still the estimate.
A 2% cost savings would help offset the nearly 4% decline in gross margins in the latest quarter. Above is a picture of the newest factory, which is not located in the conflict-ridden West Bank.
The crisis in the West Bank poses no operational threat
SodaStream is based in Israel and it has a factory in the West Bank. Due to an escalating geopolitical conflict in this region, I've written about the dynamic of this particular factory before. My colleague Alyce Lomax recently sold her shares in SodaStream because she believes the regional tension "has now dipped precipitously in the wrong direction."
On the call, CEO Daniel Birnbaum recognized that many are alarmed due to the increased firing of rockets in the region, but he believes this will continue to have little effect on SodaStream's operations:
[N]ot one of them fell in any of the regions. So mostly we are subject to these alarms where our people in the factories and at headquarters go to a safe area and then within a minute or two after that they get back to work. Our three facilities have had these alarms, but I can tell you that we have not lost a single shift, we have not missed a single shipment, and there is something here in the resilience of the people who are, either it is a matter of getting used to this unfortunate reality, or it is just not giving up and continuing to do what we need to do. We don't stop.
From a business risk standpoint I don't think there is any increased risk for production that's going on in Israel vis-a-vis any other place in the world.
The takeaway for investors
Although the worst stretch might be behind SodaStream, don't expect the company to close the year with a bang. Management revised its outlook for 2014, projecting revenue growth of only 5% and a decline in net income of 5% year over year. The previous expectations were for growth of the top and bottom line of 15% and 3%, respectively.
Based on this outlook, it's hard to make a case for buying SodaStream because shares look "cheap." The company's price-to-earnings multiple of 25 is still well ahead of the S&P 500's P/E of 19.65.
The only case to be made for SodaStream is that it will continue to have the best product in a category that's going to really pick up steam in the U.S. due to the entrance of other big players. I would wait to see that scenario play out before picking up shares.