Energy drinks specialist Securities in Celsius securities (CELH 2.12%)reported significant challenges when reporting its third quarter 2024 results on Wednesday, November 6. Key metrics fell short of analysts’ expectations due to significant supply chain disruptions. The company broke even on its net earnings per share, falling short of the expected EPS of $0.02. Revenue was about $1 million below consensus expectations, falling sharply to $265.7 million from $384.8 million a year ago, a 31% decline. This reflects ongoing operational issues despite stable U.S. retail sales and growth in international markets.

The quarter as a whole was marked by significant impacts related to changes in distributor operations rather than a lack of market demand.

Source: Celsius Holdings. Note: Analyst consensus estimates for the quarter provided by FactSet. YOY = Year after year. bps = basis points.

Celsius Holdings Overview

Celsius Holdings focuses on the production of energy drinks suitable for health-conscious consumers. Its well-known brand, CELSIUS, positions itself in the competitive energy drink market by offering products that promise calorie-burning and metabolism-boosting benefits. The company emphasizes its unique formulation, which contains no artificial preservatives or sugar, targeting health and fitness enthusiasts.

Recently, the company has focused on strategic growth through distribution partnerships and the launch of new product lines. A notable agreement with PepsiCo (DYNAMISM 0.91%) strengthens its distribution capabilities. The focus on product differentiation aims to respond to changing consumer trends. Key success factors include maintaining strong retail and global expansion efforts, continuous product innovation and effectively navigating its complex supply chain.

Quarter Highlights

The third quarter saw a substantial decline in key financial indicators, mainly due to disruptions in its supply chain. A supply chain optimization effort initiated by its largest distributor resulted in a $123.9 million drop in sales. This had a significant impact on the gross margin, which fell from 50.4% to 46%. These operational adjustments resulted in a sharp reduction in orders and revenue.

Distribution across different channels was mixed. Sales to Costco wholesale in the third quarter, increased by 15%; however, sales to WalmartIt’s Sam’s Club and BJ wholesale were negatively affected due to the timing of promotions and innovation load during the last year period. Total club chain sales decreased 4% year over year to $60.5 million in the third quarter, compared to $63.2 million in the year-ago period. Celsius sales at Amazon grew 21% year over year to approximately $27 million.

Despite overall declines, some Celsius segments saw positive results. U.S. retail sales increased 7.1% year-over-year, reflecting continued demand from brands. International sales were particularly strong, increasing 37% to $18.6 million, fueled by entries into strategic markets in Canada, the United Kingdom and Ireland. This highlights international expansion as a key driver of future growth.

Celsius has launched new flavors like Watermelon Ice and Grape Slush within its CELSIUS ESSENTIALS range. Plus, it’s recent acquisition of a co-packer represents a strategic move to improve supply efficiency and innovation capabilities. Although strengthening internally controlled production could rebalance a disrupted supply chain, these measures mean increased agility.

The quarter also demonstrated Celsius’ continued reliance on PepsiCo’s distribution deal, which accounts for a substantial portion of its revenue. The reported decline in gross margin of 440 basis points reflects increased promotional allocations and incentives, indicating difficulties in maintaining profitability with its current operating model.

Looking to the future

Despite current headwinds, Celsius maintains a strong prospective strategy involving new expansion and innovation projects. Management emphasized its commitment to long-term growth through international market penetration and product diversification. This means leveraging partnerships like the one with Pepsi to strengthen its presence in global markets.

Celsius management shared its plans for additional product innovations and strategic initiatives to regain market momentum. The company’s focus on expanding distribution networks, improving supply chain dynamicsand maintaining consumer engagement remains essential. Investors should watch for continued adaptation to supply chain challenges and continued momentum in international growth initiatives.