Analyzing Monster Beverage’s Margin Expansion in 2Q17
Monster Beverage (MNST) delivered better gross margins and operating margins in 2Q17. Its gross margin expanded to 64.3% in 2Q17 from 62.6% in 2Q16. The rise in its gross margin was due to the raw material cost savings from the American Fruits and Flavors acquisition. The acquisition of this flavor supplier and long-time business partner took place in April 2016.
Favorable changes in the domestic product sales mix also benefited the company’s gross margin. However, an unfavorable geographic sales mix and a rise in other costs adversely affected its 2Q17 gross margin.
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Higher operating margin
Monster Beverage’s operating margin rose to 38.6% in 2Q17 from 34.9% in 2Q16. The company attributed this improvement to the $27.5 million rise in the raw material cost savings from the American Fruits and Flavors acquisition.
A $25.1 million reduction in expenditures associated with distributor terminations also positively impacted the company’s 2Q17 margins. Monster Beverage has been transitioning from third-party distributors to Coca-Cola’s distribution network as part of a strategic deal between the two companies.
In comparison, PepsiCo’s (PEP) operating margin contracted by 20 basis points on a year-over-year basis to 19.0% in 2Q17. The fall was due to a rise in certain operating costs, higher commodity costs, and currency headwinds. PepsiCo competes with Monster Beverage’s energy drinks through its AMP Energy brand.
Overall, Monster Beverage’s gross margin improved to 64.5% in the first six months of 2017 compared to 62.4% in the comparable period last year. The company’s operating margin expanded to 37.2% in the first six months of 2017 from 36.0% in the first half of 2016.
We’ll look at Monster Beverage’s stock price movement in the next part of this series.