For over a year, SodaStream (NASDAQ:SODA) has been executing an aggressive plan to reposition itself away from its soda roots and toward a healthier, sparkling water brand focus. Since the change involved shipping a new product line, it has accelerated an already sharp business decline as retailers stopped selling old carbonated beverage models to clear out room for the new ones.
In its quarterly report this week, investors will finally get some hard data about whether that risky pivot is working -- that is, if the company is finding new users while reconnecting with customers who had abandoned the brand. With those high stakes in mind, here's what to watch out for in SodaStream's earnings announcement this week.
Falling sales and profits
CEO Daniel Birnbaum and his executive team said in November that they expect sales to be about $110 million this quarter. That result would be flat against the third quarter but down 13% from the prior-year period when the wheels really started to fall off on SodaStream demand. Revenue in that year-ago quarter fell 25%, which means that if the company hits its estimate this quarter, that will mark a 35% sales decline over the past two years.
The shift to a new product line accounts for some of that drop, and so does a stronger U.S. dollar, which lopped $16 million off the top line last quarter. But if management's marketing plan is working, then this quarter should at least show better sales trends on starter kits and flavorings. The bar is set pretty low on that score as SodaStream sold 22% fewer kits and 12% fewer flavor packets last quarter.
Aggressive cost cuts have helped profits hold up well, though, with adjusted operating profit rising 18% in the third quarter. But currency issues are expected to send gross profit margin down by about one percentage point in the fourth quarter to 47% of sales.
Rising carbon dioxide usage
Carbon dioxide canister refill sales are a good indicator of whether customers are staying engaged with the SodaStream brand. That's why it was good news for the business that they improved by 10% last quarter as the base of frequent users passed seven million. Birnbaum predicted that this figure will keep marching higher as "existing and new consumers embrace our repositioning".
Canister sales not only serve as a proxy for customer demand, but they're also a high-margin, recurring revenue stream. As such, it is crucial for the business that they keep rising.
Marketing and outlook changes
Marketing plays a big role in SodaStream's strategic shift since it's all about recasting the brand in the eyes of its customers. Ad spending was down by 30% through the first three quarters of the year since it didn't make sense to promote products that weren't fully available at retailers yet.
But that changed in the fourth quarter, where SodaStream launched a national campaign to try to push its household penetration and usage higher. Birnbaum will likely devote a good portion of his conference call on how well that rebranding has been working.
As for the coming year, executives haven't provided a forecast for 2016 results except to say that they hope to return to overall sales growth. That would suggest something over $410 million in sales this year. Look for a more detailed outlook on revenue and profits that incorporates the latest sales trends for SodaStream's rebranded beverage machines on Thursday.