Share price of Monster Beverage Corporation (MNST - Analyst Report) declined 4.5% in after-hours trading on May 7, as the beverage company reported disappointing first quarter 2015 results. It also provided an update on its long-term deal with The Coca-Cola Company (KO - Analyst Report).

Monster Beverage’s first-quarter 2015 adjusted earnings of 62 cents per share missed the Zacks Consensus Estimate of 68 cents by 8.8%. However, earnings increased 13.8% year over year.  

In Aug 2014, Monster Beverage entered into a deal with The Coca-Cola Company under which the latter will acquire 16.7% stake in Monster. In relation to the deal, the company has sent termination notices to the applicable third party distributors in U.S in early Feb 2015. The termination of the agreements is effective beginning in March 2015.

First quarter 2015 results include $39.8 million of deferred revenues and one-time $206.0 million of expenses incurred as a result of distributor terminations.

Monster Beverage Corporation - Earnings Surprise | FindTheCompany

Revenues

Excluding deferred revenues, Monster Beverage’s first-quarter 2015 net sales of $587.0 million lagged the Zacks Consensus Estimate of $610 million by 3.8%. Net sales however rose 9.5% year over year. Year over year, revenues were driven by strong sales of Original Monster Green energy drink and Zero Ultra.

Including deferred revenues, net sales stood at $626.8 million. Foreign currency had an unfavorable impact of $12 million on net sales.

Excluding deferred revenues, net sales of the Direct Store Delivery (DSD) segment increased 10.0% to $566.0 million. Net sales of the Warehouse segment declined 3.6% to $21 million.

Net sales outside the U.S. decreased 2.4% year over year to $113.0 million in the quarter.

Margins

First-quarter 2015 adjusted (excluding deferred revenues and distributed termination expense) gross margin rose 260 basis points (bps) to 56.1%, attributable to favorable changes in product sales mix, increase in production efficiencies and decrease in cost of some raw materials, particularly certain sweeteners.

Excluding deferred revenues and distributed termination expense, adjusted operating income increased 16.8% to $173.8 million. Operating margin was 29.6%, up 180 bps year over year.

Monster Beverage’s legal expenses during the quarter were $4.9 million, up from $2.9 million in the prior quarter. Give the expense including the distributor number

As a percentage of revenues, adjusted distribution costs decreased 30 bps to 4.4% while selling expenses declined 10 bps to 10.6%.

Effective tax rate in the quarter was 38.1%, higher than 36.1% in the prior-year quarter.

Update on the Coca-Cola Deal

In Aug 2014, Monster Beverage entered into a deal with The Coca-Cola Company, which included the sale of an equity stake and swapping of some brands with the cola giant. Under the long-term strategic deal, Coca-Cola is in the process of acquiring approximately 16.7% equity stake in the energy drink maker. Coca-Cola will transfer ownership of its worldwide energy business to Monster, whereas Monster will transfer its non-energy business to Coca-Cola. Monster has already transferred about 84% of its targeted distribution rights in the U.S. to The Coca-Cola Company and its bottling partners. The remaining 5% of its distribution rights will be transferred this month. The transaction is expected to close in early Jun 2015.

Outlook

First quarter 2015 results were hurt by the transition of Monster Beverage brands in U.S and international market from its existing distributors to The Coca-Cola Company and its bottling partners. As such, the company did not provide any specific outlook for second quarter 2015.

Monster Beverage carries a Zacks Rank #2 (Buy).

Investors interested in the beverage industry can also consider Dr Pepper Snapple Group, Inc. (DPS - Analyst Report), and B&G Foods Inc. (BGS - Snapshot Report). Both the companies carry a Zacks Rank #2 (Buy).
 

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