Against the backdrop of announcing its formal entry into the beverage alcohol market, Monster Beverage Company reported a steep decrease in margins during its Q2 2022 earnings call on Thursday afternoon, as the cost of materials and logistics weighed down record sales of $1.66 billion, a 13% increase from the same period last year. Yet those results were dampened by the soaring cost of sales, which jumped around 40% to $875.3 million.
Distribution costs also increased in Q2 to $87.9 million, an increase of 36% from 2021. Net income for the first half of FY2022 was $567.5 million, down from $718.9 in the same period in 2021.
Monster’s Energy Drink segment, which includes Monster Energy, REIGN Total Body Fuel and True North Pure Energy Seltzer energy drinks, increased sales 12.5% to $1.54 billion during Q2, compared to $1.37 billion the previous year. Sales of the company’s Strategic Brands segment, which includes the energy drink brands acquired from Coca-Cola in addition to the company’s affordable energy SKUs, decreased 9% to $79.1 million. The Alcohol Brand segment netted $32.4 million in sales for the quarter.
“Since the beginning of the COVID 19 pandemic and the subsequent increased demand for the company’s energy drinks, the company prioritized ensuring product availability for its customers and consumers,” Monster CEO and chairman Rodney Sacks said in prepared statements. “The company continues to stand by its strategy to ensure product availability and solidify the continued long term growth of the company’s brands.”
The beverage maker blamed contracting margins on higher fuel and freight costs, as well as the inflated price of raw materials like aluminum for cans and ingredient inputs. Monster vice chairman and co-CEO Hilton H. Schlosberg said that Q2 was always expected to be the worst quarter of the year for these reasons.
Yet, analysts on the call did not completely agree with Monster’s strategy of protecting volume and capacity at the cost of importing expensive aluminum cans. Goldman Sachs analyst Bonnie Herzog kicked off the question and answer portion of the earnings call by asking why there was a discrepancy between what the company had previously reported about its inventory of aluminum cans and the higher-than-expected costs incurred in Q2.
“Is this really the right way to manage the business?” she asked Monster’s leadership.
Schlosberg assured analysts that it was always part of the strategy to buy more cans at higher prices in order to stabilize capacity in the U.S. and EMEA (Europe, Middle East and Africa) and that these efforts to keep up with demand knowingly would incur more operating and inventory costs.
“We’re in this business for the long term. We’re in this business to support our customers,” he said. “Yes, maybe we did take a hiccup in gross margin in the second quarter of 2022, but there have been a lot of other cost pressures.”
The company announced it was implementing a market-wide price increase starting September 1 and a reduction of promotions to mitigate the inflated distribution costs.
Along with the announcement of Beast Unleashed, company leadership also reported that the brand’s new Monster Energy Zero Sugar line was also on track to launch in Q4 2022.
According to Nielsen data for non-alcoholic beverages ending in July 16, Monster sales were up 6% for the 12 week period with volume at 1.5% and average price up 4.6%.
Goldman Sachs maintained a “buy” rating for Monster “despite the huge Q2 gross margin miss that caught most investors by surprise.” The “trough margins” reported by the company are expected to improve in the back half of the fiscal year even as “certain headwinds are likely to persist near-term (including commodity/input cost inflation & the elevated/expensive inventory levels),” Goldman analysts reported in their company report.