Why does everyone seem to think SodaStream International (NASDAQ:SODA) suffering another quarter of lower sales is so good?
Certainly the negligible 2% decline in currency-adjusted fourth-quarter revenues to $124 million is an improvement over the 13% drop last quarter and the 25% plunge they took a year ago. And it handily beat Wall Street's expectations of just $109 million, so there's that. But sales of its sparkling water units still tumbled 24% year over year, and while the number of CO2 canisters sold was 7% higher, it couldn't overcome the decline in starter kits even though they comprise such an outsized percentage of total revenues (some two-thirds of 2015's total revenue).
It's admittedly a better picture for SodaStream than it was, but investors shouldn't delude themselves into thinking this means the sparkling water company is suddenly on the road to health.
While SodaStream is in the early stages of a transition from a do-it-yourself soda maker company to an at-home sparkling water business, it still sold far fewer starter kits under the new model than it did under the old. And SodaStream has also been the beneficiary of a failed cold beverage system by Keurig Green Mountain (UNKNOWN:GMCR.DL).
The coffee maker-cum-cold drinks appliance seller mispriced its machine and failed to put the device on store shelves right away, preferring to have a soft rollout on its website first. The move resulted in Keurig selling few units, which, when coupled with the botched launch of its new coffee machine, sent its stock reeling.
Keurig Green Mountain has only been saved by a private equity buyout bid that offered a 77% premium for its shares. In turn, SodaStream was buoyed by its rival's missteps.
The 769 units that sold in the fourth quarter was 20% higher than the number sold the quarter before, but that was 22% fewer than the number of soda kits it sold. What that means is that it's selling progressively lower numbers of water kits sequentially than it was selling soda kits even though they're higher than they were the quarter before.
It suggests the big growth opportunity SodaStream sees in water might dry up before it expands, or at least not be quite as expansive as it thought.
Bullish investors will point to the large year-over-year increase in CO2 canisters to indicate that even though people might not be buying quite as many water starter kits as they did soda kits, the important number is really the consumables it sells since they're the most profitable part of the business and account for the biggest percentage of revenue.
That's true, but canister sales were down 4% sequentially even though they're higher year over year. It seems it may be too early to tell if this is a trend or not because it made a big push with canisters as it changed its business model. The lower numbers from the third to the fourth quarter could be an indication they may have further to fall to settle at a more constant level unless it starts selling a lot more starter kits.
SodaStream attributes the lower sales of starter units to doing less advertising and promotion, which had been very high, but also says it was the basis for the profits it generated in the quarter. Yet despite the lower spending, which can only continue for so long, adjusted net income plunged by a third to $5 million.
Declining sales, fewer units sold, and lower profits don't suddenly translate into a growth story. And it's still hanging its hat on soda, though mostly in international markets. PepsiCo, however, has expanded its agreement with the water maker, a dual message that could confuse consumers and undermine its promotion as a healthy beverage alternative.
SodaStream International is admittedly in a somewhat better place than it was, but not dramatically so, and it needs more than one quarter of mixed signals to show investors it's on the right path. Caution is still called for, particularly when everyone sees what would otherwise be viewed as a mixed bag is cheered on as good news.