Taking chances is nothing new for Jones Soda (NASDAQ:JSDA). Any company that is willing to bottle soda with flavors like smoked salmon, candy corn, or green bean casserole is always up for a good gamble. However, its second-quarter results find that the alternative pop star is willing to take a chance by testing the patience of investors too.
The stock fell sharply in after-hours trading last night after the company announced that it simply broke even as revenues climbed 30% higher to $13.0 million. This may not seem so dire, unless you were caught up in the swirl of hype over Jones Soda's entry into the canned soda market outside of its original distributor, Target (NYSE:TGT).
Analysts were expecting a profit of $0.04 per share on a 47% top-line surge. Delays in the canned pop rollout hurt revenue while lower gross margins and higher marketing costs pigged out until an operating loss was left in the trough.
Money, money, money
"I want to ask this respectfully," an analyst began in questioning the company during yesterday's conference call. "When are you going to make money?"
Literally speaking, Jones Soda has made money. It has posted a quarterly loss just twice over the past four years. However, the analyst was clearly asking about a concept known as earnings growth. It's a term that Jones Soda is struggling with, having missed Wall Street's profit targets in three of the past four quarters.
Despite the disappointment, Jones Soda is trading a lot higher than it used to. Even with last night's pop pop (yes, pop pop), the stock has tripled since I first recommended it at $4 a share two years ago. Recent investors are feeling a different kind of pain, though. Shares have shed more than half their value since peaking four months ago.
The company still has a good story to tell. It's just running out of people willing to listen. Jones' canned distribution has grown from 1,500 store locations to 15,000 in the span of just six months, but many chains that were set to begin stocking the stuff by Memorial Day have just recently begun selling the edgy soft drinks.
It is the current quarter -- or perhaps the fourth quarter -- that will be more telling. A year ago, Jones Soda cans were sold only at Target, reaching out to just 2% of the canned soda market. It is now at 21% and hopes to be at 50% by the end of next year.
How lucrative can canned sodas be? Will the push eat into the perceived premium that sophisticated soda sippers place on Jones in its flagship bottles? Or as Alyce Lomax put it so succinctly last week: "Does Jones even belong in places like Wal-Mart (NYSE:WMT)? Given Jones' individualistic, high-end appeal, Wal-Mart's discount shelves seem like a poor fit for its beverages."
Brand on the run
You can't make up losing Starbucks (NASDAQ:SBUX) as a distributor by moving product at a ho-hum Ruby Tuesday in the suburbs. Jones Soda selling next to 25-cent cans of Wal-Mart's Sam's Choice colas may create incremental sales in the near-term, but does the Sam Waltonization of Jones Soda have a higher price in the long run?
The beauty of falling for a gambler like Jones Soda is that it can play many hands at the same time. They're not all good hands. The company is talking up its 24C effervescent drink mix. It is ramping up the rollout, inspired by Coca-Cola's (NYSE:KO) recent $4.1 billion purchase of the company behind VitaminWater.
I get the connection. 24C pouches pack a wallop of vitamins in a variety of flavors. I just don't think that what amounts to Kool-Aid for kidults is a growth market for Jones Soda. It may be a growth niche, but where's does Jones Soda fit in or -- more importantly -- stand out? Where is the company's core competency there? Most people probably don't even realize that Jones Soda already makes energy drinks and organic teas. Those are booming markets. Jones Soda just happens to be the quiet type.
I am more encouraged about the pouring rights that the company secured for the Seattle Seahawks. First, it means that Jones Soda is getting into the fountain business. And contrary to cynical beliefs, Jones Soda does have conventional flavors such as cola, diet cola, and lemon-lime to make sure that 70,000 gridiron fans don't have to quench their thirsts with Blue Bubblegum or Fufu Berry flavors. Unless they want to, of course. If fountain sales hold up -- and possibly even grow -- under this arrangement, other teams may come calling.
Folks are also used to paying up for concessions, so this is the kind of premium that may help offset the Sam Waltonization effect.
Questions about the company's ability to keep its brand strong as it goes mainstream may loom as large as the ultimate earnings power of the company as it turns toward cans. Jones Soda was an aspirational brand when it was being sold mostly through a motley crew of retail establishments like Panera (NASDAQ:PNRA), booksellers, and Zumiez (NASDAQ:ZUMZ). It's grown up now. It's reaching the masses. Like a great underground band with its first Top 40 hit, it risks alienating its fans for those with fickle tastes.
This is the challenge. This is the opportunity. This all leads to the most pressing question of all: How sad is it to see that Jones Soda has sold out, yet analysts are still asking where the money is?
If you like small stocks with spunk like Jones Soda, you may appreciate the Motley Fool Rule Breakers ultimate growth stock newsletter service. Subscribe today or take the taste test with a free 30-day trial subscription.
Wal-Mart and Coca-Cola are Inside Value recommendations. Starbucks is a Motley Fool Stock Advisor selection. Zumiez is a Motley Fool Hidden Gems pick.
Want to keep up with the Joneses?
- I checked in with the Joneses this past summer.
Longtime Fool contributor Rick Munarriz actually enjoys some of the more exotic Jones Soda seasonal flavors like caramel apple and key lime pie. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
