It started out as a calm morning for shares of Celsius Holdings (CELH -11.07%). But around noon, management made an appearance at Barclays‘ 17th Annual Global Consumer Staples Conference. During the chat, management said something that sparked fear in investors: In the current quarter, sales to PepsiCo (PEP 0.02%) are down $100 million to $120 million compared to last year.
Investors took action, and that’s why Celsius stock was down a painful 12% as of 3:15 p.m. ET.
How does Celsius generate revenue?
Pepsi became the primary distribution partner for Celsius in August 2022. For Celsius, it now recognizes revenue when it delivers inventory to Pepsi. From there, Pepsi distributes it to retail channels where it’s purchased by consumers. And for this reason, there’s a different between when Celsius generates revenue and when its products actually sell in stores.
In 2023, Celsius’ revenue was up an impressive 102% year over year and well ahead of expectations from analysts. But it’s now clear that this outperformance was because Pepsi ordered too much product. It’s a misstep that Pepsi is now correcting by ordering less from Celsius while it sells inventory it has on hand.
For the current third quarter of 2024, Celsius management estimates that Pepsi will order between $100 million and $120 million less than it ordered in the third quarter of 2023. To be sure, this will be a huge drag on Q3 results and it’s why the stock plunged today.
What should investors do now?
There are cases where the financials don’t clearly reflect the health of the business, and I believe this is one of those cases. During its chat today, Celsius management pointed out that Q3 sales for its products are up 10% so far. This won’t be reflected in its revenue, because it generates revenue when it supplies inventory to Pepsi. But sales to consumers are growing nevertheless.
Moreover, Celsius management believes it’s gained another whole point of market share in the energy drink space. And market share is huge for a beverage stock.
I’ll stop short of calling the bottom for Celsius stock. But I believe the explanation of what’s happening with the business is reasonable. And I consequently believe that investors are overreacting to today’s news.
Jon Quast has positions in Celsius. The Motley Fool has positions in and recommends Celsius. The Motley Fool recommends Barclays Plc. The Motley Fool has a disclosure policy.
