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Can Monster Beverage's Growth Strategies Aid a Turnaround?

Zacks Equity Research

Monster Beverage Corporation MNST is grappling with unfavorable product mix, higher freight costs and adverse currency fluctuations. Consequently, shares of this Corona, CA-based company have decreased approximately 11% in the past three months compared with the industry’s growth of 2.5%.

The aforementioned factors not only weighed on the stock’s performance but also marred its recent quarterly results. In second-quarter 2019, the bottom line fell short of the consensus mark, after surpassing the same in the preceding four quarters. Its top line missed estimates after three consecutive beats. Additionally, the company is witnessing soft margins trend for a while now, owing to higher costs.

Let’s detail out factors ailing the company’s performance.

Factors Contributing to Monster Beverage’s Dismal Run

A clear impact of higher costs was visible on the company’s second-quarter margins. Gross and operating margins contracted 120 basis points (bps) and 90 bps, respectively, in the second quarter. Input cost inflation and unfavorable product mix as well as increased freight costs have been denting the gross margin.

Further, operating expenses rose 7.5% year over year, while G&A and payroll expenses increased 20 bps and 10 bps, respectively, as a percentage of sales. Higher payroll costs stemmed from headcount growth, domestically and internationally along with increased payroll taxes. Lower gross margin coupled with these expenses hurt operating margin.

Moreover, unfavorable foreign currency fluctuations have been hurting the company’s results. Unfavorable currency partly hurt the top lines in the second quarter with impacts of $25.9 million and $30.7 million on gross and net sales, respectively. Further, net sales for the Monster Energy Drinks and Strategic Brands segments reflected adverse currency impacts of roughly $22.1 million and $3.8 million, respectively.

Can Efforts Aid Revival?

Although higher costs and adverse impact of currency are hurting Monster Beverage’s performance, its strategic endeavors and strength in energy drinks business appear promising.

The company has been experiencing continued strength in its energy drinks category driven by strong demand for brands like Monster Energy, Java Monster, Caffe Monster and Espresso Monster. Moreover, management remains optimistic that the energy drinks category will continue gaining momentum, with its Monster brand growing significantly. Also, product launches across the Monster family will drive its overall top and bottom lines. Evidently, net sales at the Monster Energy Drinks segment grew 9.6% in the second quarter of 2019.

Furthermore, the transition to Coca-Cola KO bottlers under the “TCCC Transaction”, signed in 2015, should ensure greater reach for Monster Beverage’s products.

In March 2019, the company completed the strategic alignment with Coca-Cola system bottlers in the United States, with the allotment of the Kalil Bottling Group’s distribution territories (Southwestern United States). It transitioned the distribution of Monster Energy drinks from Big Geyser’s territory, located in the New York metro markets, to Liberty Coca-Cola in April. Earlier, the Monster Energy brand was distributed worldwide through the Anheuser-Busch InBev SA/NV BUD distributors.

In second-quarter 2019, Coke Bottlers launched the Monster Energy brand in Azerbaijan, Paraguay and Saudi Arabia. Going forward, Monster Beverage remains on track with the transitioning of the Monster Energy brand to Coca-Cola system bottlers in more countries.

Further, the TCCC transaction has significantly aided the company’s international presence. Monster Beverage has been expanding international operations into various markets including China, India, African and the Middle Eastern countries. Net sales to customers outside the United States were up 16.8% in the second quarter, representing about 31% of total sales.

Innovation also plays a key role in the success of Monster Beverage. The company regularly introduces new flavors of existing products, while removing non-performing products. It is set to launch newer Monster Energy brand’s energy drinks in the United States and many international markets later in 2019. Moreover, the company continues to launch Monster Line extensions and strategic brands in the EMEA markets. It remains optimistic about the prospects of its brands and product launches. These are likely to drive top-line growth and increase overall profitability.

We believe the aforementioned factors should strengthen this Zacks Rank #3 (Hold) stock’s performance and help it win back investors’ confidence.

Meanwhile, investors may consider investing in Britvic plc BTVCY, a Zacks Rank #1 (Strong Buy) stock from the same industry. It also has an expected long-term earnings growth rate of 4.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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