5 Things SodaStream International Management Wants You to Know

By Markets Fool.com

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Water, not soda, is being made more exciting as SodaStream International introduces new sparkling water machines. Image: SodaStream International.

The first quarter earnings report from SodaStream International was depressingly familiar: soft demand, falling revenue, and the company positioning itself for the future.

But hope apparently does spring eternal among investors, because shares of the do-it-yourself beverage maker jumped 15% higher yesterday when an analyst upgraded the stock to a buy. In the midst of the turmoil, though, here are the top five things SodaStream International wants shareholders to keep in mind.

1. Our return to profitability in the U.S. market is illusory
First quarter operating income in the U.S. improved markedly year over year, but not because of an uptick in the business. In fact, things continue to deteriorate due to the decline of soda consumption here, and the industry's performance was so bad last year it was actually responsible for a change in SodaStream's business plan.

The reason the DIY beverage maker turned profitable in the first quarter was because it essentially stopped spending any money on marketing. It's waiting for the launch of its new product line in the third quarter of this year, so it's keeping its powder dry until then. Total sales and marketing expenses tumbled 30% year over year, falling to $32.5 million from $46.1 million, including the expensive Super Bowl ad it ran in 2014 that it wisely decided to forego this time around.

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CEO Daniel Birnbaum said, "Following five years of dramatic growth and retail expansion in the U.S., we are now at an inflection point which was triggered by the disappointing performance of 2014 combined with the landslide shift in the entire beverage industry in the U.S. away from traditional soda."

2. We're limiting out presence in some of the biggest retail end markets
A year ago SodaStream was talking about how its presence in Wal-Mart was a huge opportunity for it, noting that while the retailer didn't represent all the growth that was expected, "we absolutely believe this is a big initiative for our business."

My, but how a year can change things. In the first quarter SodaStream said it has eliminated its product from the shelves of as many as 1,700 Wal-Mart stores, and is paring back its presence in Macy's, Sears, and Kmart too. In all, it's reducing its retail footprint by almost 25%, going from around 16,900 locations, or doors, as they put it, to around 13,000 doors.

Naturally, the abandonment of these retailers contributed to the continued freefall in flavor sales SodaStream is experiencing, but management stressed that the business is now all about quality shelf space over quantity. If SodaStream isn't on a particular store's shelf, it's because it didn't want to be.

Said CEO Birnbaum, "There is not one door where we want to be and we're not."

Slack demand has knocked the flavor out of SodaStream International's mouth, causing flavor sales to plunge. Photo: Mike Mozart.

3. Our sales are evaporating globally, too
As my Foolish colleague Rick Munarriz pointed out the other day, SodaStream sales growth fell across every region where it has a presence. "Western Europe, the Americas, Asia-Pacific, and everywhere else -- suffered year-over-year revenue declines in the double-digits on a percentage basis."

Most worrisome is Western Europe, where it saw sales tumble 13% from last year. The regionis SodaStream's biggest market, and accounts for more than two-thirds of net sales. Sure, the fluctuations in currency exchange rates played a role in the dispiriting trend (in constant currency, Western European sales were actually up 5%), and a strong dollar and legacy machines disappearing from store shelves didn't help either -- but the drought in demand experienced here in the U.S. has now spread worldwide.

CEO Birnbaum said the results do reflect softening demand in global markets, but it's also due to "the implementation of the first stages of our growth plan which is requiring retailers and distributors to reduce flavor inventory in preparation for the upcoming launch of our new flavor line later in the year."

4. Any hope for a turnaround will have to wait
Because SodaStream isn't making any of the legacy soda machines anymore, business over the next two quarters will reflect this lack of production as retailers await the introduction of the new machine. But as that's not expected to hit the shelves until later this year, any chance the business will pick up before then is negligible.

"We are on target to launch the first stage (of the new product line) in Q3," said Birnbaum during the earnings conference call. "As exciting as our marketing strategies are, the third quarter pillar of products and innovation is naturally where our focus is."

5. Soon you'll wonder why we call ourselves SodaStream International
Because the soda industry has changed so dramatically over the past few years, SodaStream is finding it necessary to change too. Rather than a DIY soda company, SodaStream International is repositioning itself as a health and wellness company (with a side of adult beverages thrown in for good measure).

Since soft drinks are proving to be a bust, SodaStream International is now trying its hand at hard, adult beverages. Image: SodaStream International.

For example, while it's gutting its presence in big mass merchandisers like Wal-Mart and Sears, it is refocusing on higher performing and higher-end specialty retailers, including specialty grocery stores and niche health and wellness retailers. Sparkling water, and not soda, is SodaStream's new mantra, along with its new catchphrase, "water made exciting."

Birnbaum believes "that by the end of this year, most of our major markets will carry only our flagship sparkling water makers."

What all this means for investors
My colleague Rick Munarriz admits what SodaStream International is attempting remains a tall order. "Swapping fun for functional could be a hard sell, but the trends don't lie." While consumers are abandoning soda, it doesn't necessarily translate into a workable business model for the DIY beverage maker. Even after losing more than half its value over the past year, an investment in SodaStream International remains a risky proposition.

The article 5 Things SodaStream International Management Wants You to Know originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Apple and SodaStream. The Motley Fool owns shares of Apple and SodaStream. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.