Monster Beverage Fades on Unenergetic Performance

The energy-drink giant saw adjusted earnings fall, and sales growth come in far below expectations.

Dan Caplinger
Dan Caplinger
Aug 6, 2015 at 5:57PM
Consumer Goods

Image: Monster Beverage.

Consumers turn to Monster Beverage's(NASDAQ:MNST) energy drinks for a pickup when they need an energy boost, and for years, that has been a winning business model for the company. Coming into Thursday afternoon's second-quarter financial report, investors expected to see continuing growth in earnings and revenue as the company finally closed on its deal with Coca-Cola (NYSE:KO).

Yet in the end, it was Monster Beverage's quarterly results that needed a boost of energy, as sales growth slowed to a standstill, and the company failed to come close to matching expectations on its adjusted earnings. Let's take a closer look at Monster Beverage, and why it fell short of what investors wanted to see this quarter.

Monster Beverage's results look sleepy
Once again, Monster Beverage's financials were a bit difficult to untangle this quarter, as the company recognized some items related to its deal, and the shifting of various products into and out of its lineup. Net sales growth rose just 1%, to $693.7 million, falling well short of the 10% growth that investors had expected Monster to post.

After taking into account a host of one-time gains and charges from the deal, adjusted net income rose less than 1%. With an increase in the number of shares outstanding, that produced a drop in earnings per share to $0.79, more than $0.10 per share less than the consensus forecast among investors.

As we saw last quarter, the movement of various energy and non-energy drink brands between the two companies affected Monster's GAAP numbers substantially. The sale of its non-energy business had a positive impact on profits of about $161.5 million, but expenses related to obligations that Monster had to its former distributors cost the company about $12.2 million. Also, the company reported some disruptions related to the transition to the new distribution network, with uncertainties weighing on inventory levels, and transaction-related expenses eating into net income, as well.

Looking at the company's business metrics, Monster Beverage had to deal with a mix of good and bad factors. Case sales rose by almost 2.5 million, to 68 million cases, showing continuing demand for the company's products. But Monster got less in average sales per case, which fell about 2.7%, to $10.20 per case. Gross margins climbed by 1.7 percentage points, and the company saw slight growth both in its U.S. market, and internationally.

Monster CEO Rodney Sacks was happy to have the Coca-Cola deal behind it, even if it caused some disruptions during the quarter. "The Coca-Cola Company transaction represents a unique opportunity for us," Sacks said, and "to date, we have transitioned approximately 89% of our targeted distribution rights in the United States to [Coke's] distribution network." Monster is also working hard to discuss strategic arrangements with Coca-Cola bottlers throughout the world.

A new frontier for Monster Beverage
Going forward, Monster investors will have to get used to seeing some familiar businesses disappearing, and new ones taking their places. Coke's energy brands, which include Full Throttle, Gladiator, and NOS, now belong to Monster, while Monster shareholders will no longer see Hansen's, Peace Tea, or Hubert's Lemonade products discussed in its financials. That will help Monster refine its energy focus, but it might take some getting used to for investors who have watched the stock for a long time.

Perhaps of most value to investors is the fact that Monster's accounting should get a lot simpler in the future. Year-over-year comparisons will be tricky due to the unmatched product profiles across years, but at least Monster should have only minimal one-time charges in the future stemming from the Coca-Cola transaction.

Related Articles

Investors in Monster Beverage saw their shares move with great volatility in after-market trading, initially plunging as much as 8%, but recovering to about a 2% loss an hour into the session following the announcement. Now that Monster and Coca-Cola have largely set things straight, it will be up to the energy-drink giant to make the most of its opportunity, and reap stronger profit growth for all of its shareholders.