New evidence of weak US consumption! Energy drink giant Monster's revenue, profit, and sales fell short of expectations, causing a sharp drop in stock price | Financial Report

Due to weak consumer spending in the United States, consumers are reducing non-essential spending, leading to a decrease in foot traffic at convenience stores. Energy drink manufacturer Monster Beverage's second-quarter revenue, EPS, and sales volume all fell short of expectations.

Before the U.S. stock market opened on Thursday, August 8th, Monster released its second-quarter 2024 financial report.

1) Key Financial Data

Earnings Per Share (EPS): Q2 EPS increased by 5% year-on-year to $0.41, below the expected $0.45.

Revenue: Q2 revenue increased by 2.5% year-on-year to $1.9 billion, slightly below the expected $2.02 billion.

Revenue by Segment: Revenue from Monster Energy Drinks was $1.74 billion, up 3.3% year-on-year, slightly below the expected $1.84 billion. Revenue from Strategic Brands was $109.2 million, up 9.6% year-on-year, close to the expected $108.7 million. Revenue from Alcohol Brands plummeted by 32% year-on-year to only $41.6 million, far below the expected $66.9 million. Revenue from Other Businesses was $7 million, down 4.1% year-on-year, below the expected $7.44 million.

Revenue by Region: Revenue outside the U.S. reached $746 million, up 4.3% year-on-year.

Energy Drink Case Sales: Total sales volume in Q2 was 212.19 million cases, up 6.9% year-on-year, but slightly below the expected 215.42 million cases.

Average Revenue per Case: The average revenue per case was $8.73, down 3% year-on-year, below the expected $8.91.

Gross Margin: Q2 gross margin increased to 53.6%, higher than the 52.5% from the same period last year, and slightly higher than the expected 53.5%.

Operating Profit Margin: Q2 operating profit margin was 27.7%, although it decreased from 28.2% in the same period last year, it did not meet the expected 29%.

Operating Expenses: Q2 operating expenses were $492.3 million, up 9.3% year-on-year, slightly below the expected $497 million.

On Thursday overnight, Monster's stock price plummeted by over 14% in early U.S. trading.

From a financial perspective, there are several major unfavorable factors in Monster's second-quarter performance that led to the decline in the company's stock price:

1. Earnings per share fell below analyst expectations.

2. Beverage sales volume of 212 million cases dropped to the lowest level since the outbreak of the COVID-19 pandemic and was below the analyst's expected 215 million cases. This once again confirms that middle and low-end consumers are continuing to cut back on spending **

3. Although the sales in the second quarter reached a historic high, the revenue growth rate in the second quarter was the slowest since the second quarter of 2020, increasing by only 2.5% to $1.9 billion.

Rodney C. Sacks, Co-CEO of Monster Beverage, told investors during the earnings conference call: "We are a blue-collar brand, and our consumers face greater pressure than consumers in other categories."

Following the decline in performance of food and consumer goods giants such as McDonald's, Starbucks, Nestle, and Procter & Gamble, energy drink manufacturer Monster Beverage also issued a warning in its latest financial report: Due to a decrease in disposable income, American consumers have indeed reduced their consumption of beverages. Analysts point out that more corporate financial reports in the future will show clear signs of weak consumer spending in the United States.

How does Wall Street view this?

Bonnie Herzog, Managing Director and Senior Consumer Analyst at Goldman Sachs, commented on the financial report:

"Although Monster's performance in the second quarter surprised most people, we still maintain a 'buy' rating on the company."

"Expectations for Monster's performance in the second quarter have declined, due to the recent slowdown in the growth of the energy drink category in the United States, a fact that management also acknowledged at the recent shareholder meeting, largely due to the decline in foot traffic at convenience stores and reduced consumer spending."

"That being said, Monster's second-quarter revenue grew by 2.5% year-on-year, far below our expectation of 8.9%, which is even worse than feared. Part of the reason is the adverse impact of exchange rate fluctuations. Excluding the impact of exchange rates, sales growth actually reached 6.1% (7.4% excluding alcohol brands). Sales growth in the U.S. market was only 1.3%, in line with the expected soft trend; however, what was truly unexpected was that international market sales growth was only 4.3% (although after considering exchange rate factors, actual growth reached 13.7%) due to a slowdown in demand for energy drinks in certain European countries."

The Goldman Sachs report further points out that the entire U.S. energy drink market is showing a downward trend in sales, reflecting that after continuous price increases, cash-strapped consumers are beginning to tighten their spending. The current sales level has dropped to the lowest point since the early days of the COVID-19 pandemic.

Since the Fed's interest rate hike at the beginning of 2022, the growth momentum of energy drink sales has shown signs of slowing down. Persistently high inflation rates and high interest rates have dealt a heavy blow to the financial situation of working-class and middle-class families.

Based on the forecast for the 2025 fiscal year, Herzog has lowered Monster's target price for the next 12 months from $66 to $63. This adjustment is based on a 31.5x equal-weight P/E ratio and a 23.0x EV/EBITDA ratio, which are consistent with the previous figures. Herzog also noted that if foot traffic in convenience stores continues to decline and sales performance remains weak, these forecasts and stock price targets may be further adjusted.

Other Wall Street analysts' views on the energy drink market:

1) Jefferies (Buy rating)

• Analyst Kaumil Gajrawala stated that the situation this quarter is worse than expected.
• Target price lowered from $61 to $60.

2) Citigroup (Buy rating)

• Analyst Filippo Falorni anticipated bad results, but the actual situation is worse than expected.
• International sales fell well below expectations, especially in Europe, the Middle East, and Africa.
• Despite short-term soft data, he believes the slowdown in the U.S. market is cyclical, not a long-term trend, hence maintaining a Buy rating for the next 12 months.
• Target price lowered from $60 to $54.

3) Piper Sandler (Neutral)

• Analyst Michael Lavery wrote that as global economic growth slows, short-term resistance is increasing.
• Growth in the U.S. energy drink category has slowed down, however, Monster is still raising prices in the U.S., indicating a rebound in category growth in other markets from the slowdown, but it is currently unclear how long such a rebound may take.
• Target price lowered from $59 to $46.

4) Bloomberg Intelligence

• Analyst Kenneth Shea pointed out that compared to previous periods, U.S. energy drink sales are facing increased pressure from consumers focusing more on price and intensified market competition