Celsius HoldingsCELH

Celsius brought in $818 million in revenue this quarter, which was about 11 percent higher than last year but fell short of the $870 million analysts expected. Profits also came in lower than anticipated. The company earned $0.36 per share, missing the $0.42 target. This slowdown is a sharp change for a business that has been growing at a breakneck pace, and the stock fell about 16 percent following the news.

The drop in profitability was partly due to gross margin, the percentage of sales left after paying for ingredients and manufacturing, falling to 48 percent. This was caused by the costs of folding Alani Nu and Rockstar Energy into its operations. While Celsius is still gaining share in the sugar-free energy drink market, the challenge now is proving it can return to higher profit levels while managing three different brands through the PepsiCo distribution network.

See the full quarter, and how our tracked metrics did

The company filed an 8-K, a form used to tell the public about major events, reporting that it has entered into a material agreement involving new debt. Taking on debt is a common way for growing companies to fund operations or acquisitions, but it also adds interest costs that must be paid regardless of how many energy drinks are sold.

This is a development to watch because the company is currently working to improve its profit margins after buying Alani Nu and Rockstar Energy. We will need to see the specific terms to know if this borrowing helps fuel growth or simply covers the costs of combining these different brands.

Source: 8-K filing

Key highlights

• Alani Nu driving growth: The Alani Nu brand generated $364.4 million in sales this quarter, which was a record for the brand as it moved into the PepsiCo distribution network. This growth helped the company total revenue reach $818 million, an 11% increase over the same period last year.
• Core brand revenue decline: Revenue for the flagship CELSIUS brand dropped 11.7% this quarter, as the company pulled back on new product launches and shifted its focus to fixing its mix of products on store shelves. The brand also faced lower demand in the club channel, which is the large-format stores where it has historically been strong.
• Market share slipping: The company held a 20.1% dollar share of the U.S. energy drink market this quarter, down from 20.9% in the prior quarter. While the overall portfolio is still a major player, the flagship CELSIUS brand now accounts for only 9.5% of the total category share.
• Gross margin pressure: Gross margin, which is the percentage of sales left after paying for the direct costs of making the drinks, fell to 48.1% from 51.5% a year ago. The drop was caused by more expensive aluminum for cans and higher spending on store promotions to help sell through inventory.
• Margin expansion expected ahead: Management expects profit margins to improve over the rest of the year as the company moves more of its shipping and raw material buying into its new, more efficient supply chain. These internal projects are designed to offset higher costs for raw materials, which the company expects will continue for the near future.

Our take: This was a soft quarter that shows the company is struggling to manage its original brand while folding in new acquisitions. The 11.7% drop in flagship CELSIUS revenue is a real concern for a growth-focused business. While the Alani Nu acquisition is performing well, the company needs to prove it can return its core brand to growth to protect the long-term case.