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SodaStream International Ltd.’s (SODA - Snapshot Report) fourth-quarter earnings of 3 cents per share beat the Zacks Consensus Estimate of 1 cent by 200%.  However, the Estimate took into account management's warning last month about fourth quarter being much more challenging than expected.

Though the top line held up relatively well, the soda machine maker’s fourth-quarter performance was below expectations. The failure to achieve the desired margins due to pricing and cost headwinds during the holiday season led to the soft results.

The earnings per share result included share-based payments.

Revenues Held up Well

Total revenue of $168.1 million increased 26.4% year over year and beat the Zacks Consensus Estimate of $167 million.

Among the products categories, soda maker sales increased 25%, consumables (like gas refills and flavors) increased 35% and other product sales increased 26%.

Geographically, revenues increased 16% in the Americas, 38% in Western Europe, 28% in Asia/Pacific and 36% in Central and Eastern Europe, Middle East and Africa (CEEMEA).

Sales were lower than expected in the Americas due to slow holiday sales in the quarter hurt by weak store traffic at most of the key retail partners. SodaStream’s products are primarily sold at huge retail stores like Kohl’s, Corp. (KSS - Analyst Report), Macy’s, Inc. (M - Analyst Report) and Bed Bath & Beyond, Inc. (BBBY - Analyst Report).

In order to push its products in certain markets during the holiday season, the Zacks Rank #5 (Strong Sell) company had to slash its selling prices despite higher product costs. Also, the company had to offer higher discounts than planned to lure customers. A shift in product mix also hurt profits significantly in the quarter.

In Western Europe, France, Germany and Italy drove the strong growth. In Asia Pacific, strong gains in Australia offset weakness in Japan. Strong performance in Israel and Czech Republic led to the growth in CEEMEA.

Margins Decline Massively

Gross margins declined a massive 1060 basis points (bps) year over year to 42.4%, well short of a target of about 53%. Lower selling prices on soda makers as a result of aggressive discounts and promotions; higher sales to lower margin alternative channels such as television shopping; unfavorable product mix; higher product costs and currency headwinds hurt the gross margin performance.

The sales and marketing (S&M) expense ratio improved 620 bps in the quarter due to lower promotional and advertising expense as a percent of revenues. Despite lower S&M ratio, adjusted operating margin declined 430 bps year over year to 1.6% due to weak gross margins.

Annual Results

SodaStream’s shares plummeted last month after it issued disappointing preliminary results for 2013 citing difficult consumer spending environment and currency headwinds. The actual results were almost in line with the pre-announced results.

In fiscal 2013, the company witnessed 29.0% increase in revenues to $562.7 billion, in line with the Zacks Consensus Estimate and the lowered expectations announced last month.

Net income declined 4.2% to $42.0 million, also in line with lowered expectations announced last month. Earnings per share of $1.96 per share beat the Zacks Consensus Estimate of $1.94 by 1.0% but declined 6% year over year.

2014 Outlook

SodaStream expects some of the headwinds seen in the second half of 2013 to continue into the first half of 2014.

Management expects the first quarter to be challenging in terms of both top and bottom line. Elevated inventory levels at retail customers and soft U.S. traffic is expected to pressure the top line. Soft sales, currency headwinds, and higher advertising and promotional expenses in the Americas and increased marketing investments in Europe are expected to hurt profits in the quarter.

However, SodaStream did note that they hope to restore margins to past levels later on in the year.

Full-year 2014 revenues are expected to increase approximately 15% over 2013 revenues of $562.7 million. Gross margin is expected to be approximately 50%, similar to the 2013 levels.

2014 EBITDA is expected to increase approximately 11% year over year. Excluding currency headwinds, EBITDA should grow 25%. Tax rate is expected to be higher than 2013.

Full-year 2014 net income is expected to increase approximately 3% year over year.

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