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Jones Soda Co - Are We Keeping Up?



September 03, 2007 – Comments (6) | RELATED TICKERS: JSDA

I first reported on what a disaster Jones Soda (JSDA) was going to be for investors back in April, where I showed where the growth in earnings had come and I concluded those items would "murder" earnings in the future.

Jones Soda has since had two quarterly earnings reports so it is time to take another look, in particular, the last earnings release.

I can hardly get past the highlights:

  • 1,722,795 total cases compared to 961,000 cases one year ago
  • Revenue increased 29.8% to $13.0 million compared to $10.0 million a year ago.
  • Gross margin decreased to 34.2% versus 38.0% last year
  • Diluted earnings per share were $0.00 compared to $0.10 a year ago.

The first two points ought to send anyone still vested utterly running from this stock.  They have a 79% increase in the number of case equivalents sold but only a 30% increase in revenue.  That is an utter implosion of earning potential.   To their credit, the third point shows that they managed to only lose 3.8% of their gross margin and on the surface this appears very good as this kind of implosion of earnings could put them into irrecoverable loss position.

As an investor you'd expect a 79% increase in sales to result in a 79% increase in earnings, but the 4th point shows that earning are now non-existent and not the 18c per share as a back of the napkin calculation would lead you to expect.  Jones Soda has growth here, but so far entirely at the expense of profitability.

So, looking a little deeper...  They had earnings of $40.7 thousand compared to earnings of $2.3 million, or another way of expressing that was that earnings were about 5600% higher a year earlier, or alternatively, this quarter's earnings are 1.8% of the earnings one year ago, 98.2% of the "earnings" disappeared...  That is known as an implosion of earnings...

But, that's just on the surface.  Above I mentioned how a 79% increase in output with only a 30% increase in revenue could put them in an irrecoverable loss position.  One has to ask whether they are in fact in an irrecoverable loss position.  Over a year earlier the operating expenses increased to 38.4% of the revenue, from 31.1%, and that is enormous, an increase from $3.1 million to $5.0 million, or an increase of $1.9 million, fully 14.5% of the revenue.  The cost of goods increase by $2.3 million, for total increase in costs of $4.2 million, yet the revenue was only up by $3 million.  In addition, the licensing revenue was also down by $0.1 million, so "total revenue" was actually only up by $2.9 million.

Having an extra $4.2 million in costs and only an extra $2.9 million in total revenue is very bad.  And looking at page 5 of the financial reports what has happened leaps off the page.  Looking at the operations only, the earnings before taxes for the three months ending June 30, 2006 were $836 thousand, or about 3.5c per share.  After paying taxes as investors ought to expect them to be paid, without that monkey business accounting that grossly overstates earnings and allows executives to have cash-out-the-options liquidity events, the eps ought to have been around 2c, not the misleading-about-operations 10c.

For the quarter ending June 30th of this year they have a $504k loss on operations, or about 2c/share.  It wasn't much better the March 31st quarter as that one shows a $428k loss, so the loss on their operations has increased by 18% between quarters, yet at the end of the magic of accounting both quarters actually showed positive earnings, $40.7k and $58.3k.  Make no mistake here, Jones Soda's operations are currently being run in a loss position.  What is giving the appearance of making ends meet is interest income and deferred taxes.

Interest income was $441k in the March 31 quarter and $416k in the June 30th quarter.  This interest income is the largest contributor to giving the appearance of making ends meet and will decline as the capital is spent on expanding the operation and covering the deficit in earnings.  The other item that enables the company to look like it isn't in a loss position on operations is income tax benefits.  For the March 31 quarter $45k of the "earnings" is positive taxes.  For the June 30th quarter there is $128k of positive taxes.  So, $416k in interest and $128k in positive taxes enables Jones Soda to show $40k of earnings instead of $504k of losses in the most recent quarter.

So, they have these enormous "growth" plans, a network of 15,000 retail outlet to market their soda through, but where do the earnings come from?  Growth at the expense of a profit margin isn't a good thing and the financial reports do not explain how this will be turned around.

6 Comments – Post Your Own

#1) On September 03, 2007 at 3:11 PM, kristm (99.76) wrote:

How much of that is related to their maneuvering to get Jones products on the shelves at Wal-Mart? They probably had to cut their per-case margins down by a LOT to make that happen. And the Wal-Mart sales are of canned soda with a lower margin than the bottled soda they were mostly selling previously.

But how much of that is a one-time thing and how much of it is a permanent change? If they temporarily cut prices to get the WMT deal done and can raise the case price later it'll all work out - especially if WMT customers get addicted to the product and demand it at any price. If it's a permanent change and WMT can put the screws on them like they do Rubbermaid or other commodity vendors then it's bad news for the Jonses.

Ultimately you have to boil it all down to this: is Jones Soda a commodity or a niche? If it's a commodity it can easily be replicated or replaced at a lower price, if it's a niche then they have (or will have) enough control to raise their prices and fix these profitability issues.

Is Jones going to be the next Rubbermaid, changing prices to whatever Wal-Mart demands, or will they be an Anheiser-Busch with a premium product and price flexibility? 

I'm interested to see if you're right - good post, well argued. Now we'll just have to sit back and see.

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#2) On September 03, 2007 at 4:27 PM, ikkyu2 (98.05) wrote:

Oh, yes, kristm, once Wal-mart is dependent on Jones Soda for all its Jones Soda stocking needs, then Jones Soda will really be able to turn the screws on Wal-mart, mercilessly jacking up prices.  They'll be able to soak Wal-mart for all they're worth.

Seriously, were you born in a barn?  Wal-mart has a history with negotiations like this, and it's nothing like the picture you pain.  The real story is that Wal-mart will wait a year or two until they're essentially responsible for selling 100% of Jones Soda's output, give or take a percent or two.  Then they say, "You're charging us too much.  Reduce your price or we stop selling you."  Now what is Jones Soda to do?  They have no choice- either they reduce prices further or they quit generating revenue.  Either way the profit winds up on WMT's balance sheet, not JSDAs.  The fact that JSDA's board even considered such an agreement - never mind that they actually implemented it - tells me that, in their mind, they're out of the game already.

Relying on WMT as a primary buyer has bankrupted company after company in the U.S.  WMT doesn't care - there's an endless supply of companies to bankrupt this way as far as maintaining their monopsony is concerned.  If you are going to frame JSDA as a commodity, you must look at it this way.

 If you are going to frame JSDA as a 'niche' i.e. producing a product for which there can be no substitution, then I suggest you immediately start by comparing the number of loyal customers for Coca-Cola, worldwide, to the number of people who've ever heard of Jones Soda.  I believe you'll find that if this is what you find most important about JSDA, you'd do better to put your money in KO, and buy as much Jones Soda as you want to drink with the dividend checks.

dwot, great analysis as always.  Every time I read your entries like this, you've got me rolling in the aisles.

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#3) On September 03, 2007 at 5:41 PM, dwot (29.30) wrote:

Interesting comments Kristm and ikkyu2.

I have only seen Jones Soda in a store once, when I was on vacation and in a Buy-Low kind of grocery store.  I couldn't believe how low they were selling the Jone's Soda.

It gave me two thoughts, one, there couldn't be a profit margin at that price, and two, going for market penetration with cost conscious consumers isn't the way to go.  They tend to be price loyal rather than brand loyal so your clients are very price sensitive. 

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#4) On September 05, 2007 at 7:59 AM, abitare (30.33) wrote:

I wanted to short the stock. But I wanted to at least try the soda first. Maybe it would be great and I would understand the valuations. But I could not find Jones soda, just a bunch of "knock offs".  I went to Starbucks and a  three grocers. No Jones Soda to be found.

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#5) On September 08, 2007 at 6:46 PM, dwot (29.30) wrote:

The lawsuit just launched would probably make shorting pretty safe.  These guys have a serious cash flow problem without a lawsuit.

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#6) On November 25, 2007 at 9:54 AM, kristm (99.76) wrote:

"Oh, yes, kristm, once Wal-mart is dependent on Jones Soda for all its Jones Soda stocking needs, then Jones Soda will really be able to turn the screws on Wal-mart, mercilessly jacking up prices.  They'll be able to soak Wal-mart for all they're worth."

I was referring to how WMT turns the screws on its vendors, not saying Jones would turn the screws on WMT. If Jones differentiates itself then they're more immune to that kind of treatment - if their products become commoditized then they're at the mercy of Wal-Mart.

Thanks for the insult, perhaps you should read posts more than once and think about what they actually say before you have diarrhea of the keyboard.

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