Celsius Holdings’ stock tumbled on Thursday after missing Q2 earnings targets, a shortfall driven by the growing pains of integrating its namesake beverage, Alani Nu and Rockstar beverage portfolios, into PepsiCo’s distribution system.
The company aimed to soothe investor fears by highlighting its plan to spend $300m over the course of the year to buy back company stock as a signal of its confidence that Celsius stock is undervalued.
Celsius Holdings CEO and Chairman John Fieldly explained in an earnings call that the energy drink category “remains one of the strongest-performing” in the beverage industry.
“New consumers are entering the category through our brands, and we are winning new occasions with them. We are a key growth driver for the energy category, and we are just beginning to unlock the full potential of our expanding portfolio,” he said.
Investor worries
The company’s stock plummeted by more than 18% on Thursday after the underperformance, relative to Wall Street analyst estimates, was revealed.
Celsius reported earnings of 36 cents per share on revenue of $817.93m, missing the consensus estimate of 42 cents per share on revenue of $887.71m, according to Earnings Whispers.
“The company missed expectations by 25% while revenue grew 10.64% on a year-over-year basis,” Earnings Whispers noted.
Distribution growing pains
Fieldly explained that integrating the brands into the PepsiCo distribution system has driven time-consuming and costly reorganization in other parts of the company.
Celsius eliminated several underperforming SKUs in preparation for the PepsiCo rollout, but the aggressive release of different varieties is part of what helped the energy drink company win in the market.
“Over the years, we’ve built the Celsius brand by taking decisive actions to break through, lead launches of exclusive flavors for individual retailers, actions that got us on the shelf in a category that did not have a place for modern energy yet,” Fieldly said. “That is how you build a challenger brand. But today, Celsius is a powerful national brand inside one of the largest distribution systems in the country.
He said the so-called SKU rationalization came ahead of another challenge posed by the integration: establishing coolers and fixtures in the stores.
“We also used this as an opportunity to achieve better retail space, not just more of it, but the right kind: cold space, end caps, permanent coolers in the highest traffic parts of the stores,” Fieldly noted. “And we purposely delayed innovation while we brought on Alani and Rockstar into the system to minimize complexity in the distribution at a time of significant change.”
The removal of those SKUs, which preceded the establishment of the new coolers and fixtures, caused a pause in product innovation, “which is one of the biggest growth drivers in the category,” according to Fieldly.
“Looking back, I definitely would have not cut as many SKUs within the organization through these commercial plans,” he said. “But I think by taking the key learnings we have today, we’ve added stability within the portfolio.”
Stock buyback
Celsius is sending a clear message to investors that it believes in the business through a $300m stock buyback plan for the year.
Celsius Holdings CFO Jarrod Langhans said the company delivered $818m in revenue during the second quarter, up 11% year over year.
Celsius led the company with revenue of $387m for the quarter, followed by Alani Nu with $364.4m and Rockstar with $66.5m.
Alani Nu net sales were up 21% year over year, while Celsius was down 11.7% year over year. No comparable data was available for Rockstar, which was purchased by Celsius less than a year ago.
Langhans said the stock buyback, which was approved last year, has resulted in $124m in purchases in the first half of the year. The remaining $176m will take place later in the year.
“The reason why we are leaning into repurchases is straightforward. Our cash flow return on investment is among the strongest in the beverage category, and at current levels, we view repurchasing our own stock as an attractive use of capital,” Langhans said. “Our approach continues to be grounded in the same three priorities: investing to support brand growth and execution, maintaining the strength of our balance sheet and returning capital to shareholders.”
