Monster Beverage Corp (MNST)

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Monster Beverage (MNST) Q2 Earnings & Sales Beat, Costs Hurt
By: Zacks Equity Research | August 6, 2021

Monster Beverage Corporation (MNST) reported better-than-expected top and bottom lines in second-quarter 2021. Its sales and earnings also improved year over year. Results gained from continued strength in its energy drink category, particularly the Monster Energy brand. Going forward, management doesn’t expect any material impact of the COVID-19 pandemic on the functioning of its co-packers and bottlers/distributors, who manufacture and distribute products, respectively.

However, logistics issues, including shortages of shipping containers and global port congestions, higher input costs and freight inefficiencies hurt gross and operating margins in the second quarter. The company was unable to fully meet the increasing consumer demand in the United States and EMEA in the second quarter due to the shortages in aluminum cans and delays in procuring certain ingredients.

Shares of this Zacks Rank #4 (Sell) company have gained 0.7% in the past three months compared with the industry’s 5.3% growth.


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Q2 Highlights

Monster Beverage’s earnings of 75 cents per share rose 28.6% year over year and beat the Zacks Consensus Estimate of 67 cents.
Net sales of $1,461.9 million improved 33.6% year over year and surpassed the Zacks Consensus Estimate of $1,388 million. Favorable currency translations contributed $38.6 million to net sales in the reported quarter. Robust year-over-year top-line comparisons mainly reflected more severe impacts of the pandemic in the year-ago quarter.

Net sales to customers outside the United States rose 66.4% to $546.3 million, representing about 37% of net sales.



Segmental Performance

Monster Energy Drinks: The segment primarily includes brands like Monster Energy drinks and Reign Total Body Fuel high-performance energy drinks. The segment’s net sales increased 33% year over year to $1.37 billion. The segment’s sales included a positive impact of $35.5 million from favorable currency rates.
Strategic Brands: In addition to the affordable energy drink brands, the segment includes a range of energy drink brands acquired from The Coca-Cola Company (KO Quick QuoteKO - Free Report) . The segment’s net sales improved 45.9% year over year to $86.9 million in the second quarter. Currency tailwinds aided the segment’s sales by $3.1 million.

Other: Net sales in the segment, which includes some products of American Fruits & Flavors sold to independent third parties (AFF Third-Party Products), grew 19.7% year over year to $7.9 million.

Costs & Margins

The company’s second-quarter 2021 gross margin contracted 210 basis points (bps) to 57.2% due to the adverse geographical sales mix and higher input costs caused by increased raw material freight-in costs and aluminum can costs.
In the second quarter, the company continued to witness shortages in its aluminum can requirements in North America and Europe, owing to its higher volume growth and the ongoing supply constraints in the aluminum can industry. The company is also witnessing delays in the procurement of certain ingredients, both domestically and internationally. This has led to heightened challenges in meeting the increased consumer demand in North America and EMEA in the second quarter.

To meet the demand challenges, the company has taken steps to source additional quantities of aluminum cans in excess of its contracted volumes from the United States, South America and Asia. However, logistical issues, including shortages of shipping containers and global port of entry congestion, are likely to delay the arrival of imported cans, with deliveries likely to increase sequentially in the second half of 2021. Additionally, it has entered supply agreements with two suppliers of aluminum can in the United States, which are anticipated to be operational in the fourth quarter of 2021.

Apart from this, the company is also facing freight inefficiencies as well as significant increases in domestic and international freight costs. It is experiencing higher input costs, particularly for aluminum, and other costs in the current environment. The headwinds have resulted in higher cost of sales as well as increased operating expenses in the second quarter, impacting both gross and operating margins.

Management expects challenges related to the supply constraints in the aluminum can industry, shortages of shipping containers, global port congestions, and higher freight and input costs to continue for the next few months. This will continue to adversely impact gross margin rates.

Operating expenses grew 23.3% year over year to $310.9 million. The increase can be attributed to the lower expenditure in the year-ago quarter toward sponsorships, endorsements and other marketing activities, primarily as a result of the pandemic. As a percentage of sales, operating expenses declined 180 bps to 21.3%. Lower operating expense rate was mainly due to reduced general & administrative expenses, offset by higher selling and distribution costs.

General and administrative expenses, as a percentage of net sales, contracted 280 bps to 7.9%. Selling expenses, as a percentage of net sales, rose 20 bps to 9%. Distribution costs, as a percentage of net sales, expanded 80 bps to 4.4%.

Operating income of $526 million grew 29.1% year over year. However, operating margin contracted 120 bps to 36% for the reported quarter.

Other Financials

Monster Beverage ended the second quarter with cash and cash equivalents of $1,584.2 million, and total stockholders' equity of $5,905.5 million. Short-term investments as of Jun 30, 2021, were $969 million, while long-term investments were $91 million. The company does not expect the pandemic to have any effect on its liquidity.
In the reported quarter, the company did not buy back any shares. As of Aug 5, 2021, it had $441.5 million remaining under the previously authorized share repurchase plan.

Stocks to Consider

PepsiCo, Inc. (PEP) currently has a long-term earnings growth rate of 8.4% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Heineken NV (HEINY), also a Zacks Rank #2 stock, has an expected long-term earnings growth rate of 25.2%.

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