SodaStream International (SODA) reported fourth quarter earnings Wednesday, and thought it was an ugly report by most standards, the company did show improvements on the bottom line.
Quarterly revenue fell nearly 25% year-over-year to $126.5 million, which slightly missed the consensus estimates of $127.1 million. The company saw adjusted earnings improve from just $0.03 a year ago to $0.35 per share. That easily beat the analyst consensus of $0.17.
For a company in transition, the results were encouraging -- management seemed to have learned from the disappointing results last year when excess supply during the holiday season forced massive discounting that nearly wiped out all profit for the quarter. Through limited promotional sales, gross margin improved from 42.4% in the year-ago quarter to 50.4%.
As demand for its soda flavors has ebbed, SodaStream has instead repositioned itself as a sparkling water company, selling a new portfolio of water-enhanced flavors, taking aim at the health and wellness market.
Sales in the Americas fell 49% year-over-year, while overall sales of starter kits and flavor units dropped by by 34% and 38%, respectively. However, sales of CO2 refills grew 17%, a sign that the sparkling water strategy might pay off in the long run. Management blamed the drop in starter-kit and flavor sales on a lack of discounting and promotional activities compared to the previous year. Changes in currency exchange rates also added a sales headwind of about 6%.
While profit topped expectations and rising CO2 refill sales are promising indicators for investors, 2015 will be the true test of the SodaStream turnaround strategy. Analysts see sales increasing just 2% this year but modest earnings improvement. Based on recent performance, I would expect SodaStream to top EPS expectations of $1.23 in 2015.
Look for a further increase in the gross margin and for evidence that the water strategy is working, which might be most visible in increased CO2 sales.
There is clearly a market for enhanced water and sparkling water beverages, but SodaStream needs to streamline its distribution channels and make CO2 exchanges easier for customers. Opportunities also exist for ramped-up sales in offices and other commercial businesses.
As the earnings report shows, SodaStream is not dead. The fad that produced skyrocketing U.S. sales a few years ago might have passed, but there are still profits to be made. It is up to management now to make the most of this second chance.
