Monster: Q1 Earnings Underwhelm Analysts

Monster Energy reported a rise in net sales in the first quarter of 2018, but a significant drop in gross profits has left investors pessimistic about year-end margins for the energy drink company.

Net sales for the quarter were $850.9 million, up 14.7 percent from $742.1 million in the first quarter of 2017, CEO Rodney Sacks said on an earnings call with investors and analysts Tuesday. However, gross profit was down significantly at 60.6 percent, compared to 64.8% for the quarter in 2017 and 62.1 for Q4 of 2017.

For the core Monster Energy brand portfolio, net sales rose 16.7% over last year to $780.5 million. However, the company’s Strategic Brand portfolio, which includes brands like Full Throttle and NOS, fell to $65.8 million in Q1 from $68 million in the same period last year.

Distribution costs as percentage of net sales were up to 3.9 percent in the quarter, compared to 3.1 percent in 2017. Selling expenses were down to 11.5 percent compared to 11.7 percent in 2017.

The company also benefited from the Tax Reform Act signed into law in December, reducing the corporate tax rate from 32.8 percent last year to 23.3 percent.

Sacks noted that the company solved its production capacity issues for Java Monster and Muscle Monster that strongly impacted those lines last year.

“The production capacity shortages that we experienced in the second half of 2016 for both Java Monster and Muscle Monster were largely worked through by the fourth quarter of 2017,” Sacks said. “Both Java Monster and Muscle Monster came up for allocation by the end of that quarter. Together with our bottling partners, we are currently focused on regaining lost shelf space for these products.”

CNBC reported today that although the company’s earnings were in line with Wall Street analysts’ projections, Monster’s leadership warned investors there would be future profit-margin pressure due to higher gas and aluminum pricing, suggesting year-end results could be low.

JP Morgan downgraded Monster Energy’s rating from overweight to neutral and the company saw a 7.5 percent dip in stock value this afternoon.

Wells Fargo Securities beverage analyst Bonnie Herzog wrote she was disappointed by the results, leading the firm to lower its year-end estimates for Monster’s target stock price by $8 to $53.

“[Monster] delivered a generally disappointing quarter, in our view, as the top-line miss was compounded by signs of continued gross/operating margin compression and little conviction from mgmt about its ability/desire to price through the pressure,” Herzog wrote. “Given [Monster]’s stepped up promos & deteriorating net sales/case, we’re not convinced that [Monster] will be able to pass through pricing, especially given softening c-store trends as rising gas prices beleaguer low income consumers. Therefore, we are left rather uninspired & on the sidelines for the time being.”