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Monster Beverage Corporation’ (MNST - Analyst Report) reported dismal third-quarter 2013 results, once again missing the Zacks Consensus Estimate for both earnings and revenues.

The Zacks Rank #4 (Sell) company’s third-quarter 2013 adjusted earnings of 53 cents per share missed the Zacks Consensus Estimate of 57 cents by 7.0%. We believe weak top line and higher professional services costs led to the earnings miss. Earnings increased 13.1% year over year.

Revenue Discussion

During the quarter, Monster Beverage’s net sales rose 8.9% year over year to $590.4 million. However, net sales missed the Zacks Consensus Estimate of $599 million by 1.4%. The company’s energy drinks (especially the Monster Energy brand) were once again soft both in the U.S. and Europe. In addition, the company’s new Monster Energy branded Zero Ultra and Ultra Blue energy drinks cannibalized sales of the existing brands, hurting overall top line. Monster Beverage like other beverage giants, PepsiCo, Inc (PEP - Analyst Report), The Coca Cola Company (KO - Analyst Report) and Dr Pepper Snapple Group, Inc (DPS - Analyst Report) are seeing sluggish sales due to softness in the North American beverage industry.

Net sales of the DSD segment increased 9.8% to $566.8 million while warehouse segment decreased 7.9% to $23.7 million.

Margins Disappoint

Gross margin grew 160 basis points (bps) to 52.1% on the back of favorable product sales mix. A significant percentage of sales came from high-margin brands like Ultra Zero, Ultra Blue and Rehab Pink Lemonade.

Despite gross margin expansion, operating margin declined 40 bps in the quarter to 25.6% due to higher professional service costs. The company’s professional services costs were related to regulatory matters and litigation expenses concerning safety issues and marketing/promotion activities of its Monster Energy line of energy drinks.

Distribution costs increased 20 bps to 4.6% while selling expenses increased 40 bps to 12%. General and administrative expenses also increased in the quarter attributable to increased professional services costs.

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