SodaStream's Recovery Gains Steam

By Demitrios

Image source: SodaStream.

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SodaStream (NASDAQ: SODA), maker of at-home carbonated-beverage machines,has been telling investors for nearly two years that a brand reboot around sparkling water would produce a sustained rebound in sales growth. That claim found support in the company's second-quarter report, released on Tuesday morning, which showed significant progress at boosting revenue and profits.

Here's how the headline numbers stacked up against the prior-year period:

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Data source: SodaStream's financial filings.

What happened this quarter?

SodaStream's 17% growth in revenue marked an improvement over the prior quarter's 10% bounce. Each of its geographic markets -- including the critical U.S. division -- contributed to the sales gains.

Highlights of the quarter included diverse areas of the business:

  • The U.S. market posted a 12% revenue improvement, marking an acceleration over the prior quarter's 10% rise (and the 6% decline from 2015's final quarter).
  • Europe, SodaStream's biggest segment, logged a 14% sales boost.
  • SodaStream sold 30% more beverage machines around the world and managed an 18% jump in flavor sales.
  • Gross margin ticked up to 51% of sales from 50% last year as foreign currency swings settled down and the company began reaping benefits from its production optimization efforts.
  • Carbonation refill sales rose 9%, to 7.5 million. That pace was a slowdown from the prior quarter's 12% uptick, but still points to steady at-home use of SodaStream's machines.
  • Cash flow improved to $14 million from a $1 million drawdown last year.

What management had to say

"There were several highlights from the second quarter that reinforce our confidence in the strategic course we have set," CEO Daniel Birnbaum said in a press release. Among these were rising profitability, broad-based sales growth, and reaching a record high customer base of nearly 8 million homes. Birnbaum specified that all geographic regions of the company experienced brand growth: "Our work repositioning the SodaStream brand around sparkling water and effectively communicating the compelling benefits of our home carbonation system helped drive double digit revenue growth in each of our four geographic regions."

Image source: SodaStream.

Notably, Birnbaum said, the company made progress in convincing customers to try out its new approach by purchasing a sparkling-water machine: "Our performance included a sharp acceleration in sparkling water maker sales as our marketing programs aimed at increasing household penetration are resonating with consumers. ...While we are pleased with our recent results, our focus is firmly on the future and the continued successful execution of our long-term growth plans."

Looking forward

While many operating trends showed positive momentum for SodaStream this quarter, including profitability, cash flow, and canister refills, the spike in machine sales says the most about its improving growth potential. The good news for the business is that the bounce appears to have been directly fueled by the company's marketing spending: Advertising expenses rose to 15% of sales from 13% last year.

That growth implies SodaStream has finally found a marketing message that conveys its new sparkling-water branding in a way that customers respond to. These beverage-making fans, rather than abandoning the segment as a fad, are buying into the premise behind do-it-yourself carbonation.

SodaStream's key challenge now is to first convince a growing segment of households to take home one of its new machines. After that, it can maximize earnings by promoting heavy use of the product that spurs recurring sales of flavor and carbon dioxide canister refills. That virtuous cycle reversed course through the company's shift away from a soda focus last year, but now appears to be headed in the right direction again.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool owns shares of 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.