The verdict may be in on SodaStream International (NASDAQ:SODA), the highly shorted growth stock that peaked near $80 before crashing all the way down to $20 this year. Macy's recently announced it would stop carrying the brand in response to weak sales, a move that could lead other retailers to cut ties, and the DIY soda company said it would reduce costs by shutting down its factory in the West Bank to set up shop in another part of Israel.
SodaStream bears had insisted that the company's push into the U.S. would ultimately fail, and it seems they were right. The pain began in the last holiday quarter and has continued through 2014. So far this year, revenue in the U.S.-dominated Americas region has fallen 28% to $105 million; in the last three months, the drop was even sharper as sales fell 41%. Expansion in the U.S. was the justification for the stock's rise earlier, so it's not a surprise to see the reverse effect as sales slide. Overall, though, SodaStream's sales are only down slightly for the year, thanks to growth in Europe and Asia.
So what happened to the American market?
In an interview with the British newspaper The Independent, CEO Daniel Birnbaum said, "We made a mistake spending millions of dollars in a Super Bowl commercial to get Scarlett Johansson to say 'Sorry, Pepsi and Coke', because people don't want to drink Coca-Cola; they're looking for ways to drink more water. That was our mistake and we're sorry."
While Coca-Cola and Pepsi have seen volume declines in North America in recent years, their sales remain enormous. What likely torpedoed SodaStream in the U.S. was a combination of health concerns about soda, a lack of distribution at supermarkets, the inconvenience of exchanging CO2 bottles, and the faddish nature of the product, which meant some SodaStream starter kits never saw the light outside the cupboard.
The plan for the future
In response to the flagging U.S. sales, management released its growth plan with the third-quarter earnings release. The 39-page document makes no bones about SodaStream's predicament, saying, "We outgrew our internal capacity and expanded our product range resulting in operational complexity and erosion of our profit margins," and, "In the US market, our acquisition rate of new users has dramatically slowed down but usage rates continue to be strong."
To combat the decline in American sales and the fading popularity of soda, SodaStream is rebranding the company around sparkling water. SodaStream's plan calls the trend a "landslide shift to 'Health & Wellness'" as consumers move from sodas to "Water +" beverages. One sign of the change in SodaStream's results was that sales of CO2 units increased 10% in its most recent quarter, while flavor unit sales fell 8%, indicating consumers are using the device for carbonated water rather than soda.
While soda is on the decline in the U.S., sparkling water sales jumped 33% last year, with flavored sparkling water sales up 62%, which is why SodaStream sees such a big opportunity.
To redirect the company toward sparkling water, SodaStream plans to bring in new talent, expand the board of directors, and consolidate operational structure for "simplicity and efficiency." SodaStream will also change its slogan from "Set the Bubbles Free" to "Water Made Exciting." Packaging and other marketing materials will be changed to reflect the company's emphasis on sparkling water, and it will introduce a new "water+" category of flavors, as well as new machines called the "Splash" and "Power." Improving distribution will also be key -- the company plans to add new accounts in supermarkets and convenience stores, as well as increase e-commerce activity, and make CO2 exchanges easier. Finally, in order to boost operational efficiency, the company will eliminate certain SKUs, and consolidate its two existing facilities into the newly built Lehavim facility, which should lower costs by 2% starting in 2016.
Will it work?
Prospects for SodaStream haven't looked good in nearly a year, but management deserves credit for admitting the problem bluntly and confronting the challenges head-on. Investors should also remember that this management team brought SodaStream so much growth in recent years despite the company having been around for more than a century. Birnbaum helped steer the company toward its public offering in 2010, and drove 43% compound annual revenue growth from 2009-2013.
SodaStream has shown that an opportunity exists in sparkling water, but it still must overcome the same challenges it met in the U.S. with soda, namely expanding distribution and making cartridge exchanges easier. That will be the true test for the company.
The best news for shareholders now might be that, despite its woes, the company is still profitable and has a solid balance sheet. At a P/E of 16, the stock seems to have hit a bottom as the company is already rumored to be a takeover target. Guidance for the fourth quarter was dismal, but the DIY soda maker could begin to come back in 2015. Excluding the flavor units, SodaStream-made sparkling water is much cheaper than in-store brands, but the company still has to the convince the American consumer of its benefits. Look for a renewed marketing push as a first step. Getting that buzz back will be tough, but SodaStream has been around over 100 years. It's not about to go flat anytime soon.