Why Monster Beverage’s Margins Contracted in 3Q17
Monster Beverage’s (MNST) gross as well as operating margin contracted in 3Q17 despite strong sales growth. The company’s gross margin contracted to 62.6% in 3Q17 from 63.8% in 3Q16. Monster Beverage’s lower gross margin was mainly due to the geographic sales mix, as the company’s international operations usually generate lower profit margins compared to the US operations. Monster Beverage’s 3Q17 gross margin was also impacted by an unfavorable product sales mix and a rise in other costs.
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Operating margin contracted in 3Q17
Monster Beverage’s operating margin contracted by about 200 basis points on a year-over-year basis to 34.9% in 3Q17. This decline was mainly caused by higher distribution termination expenses. The operating margin in 3Q17 was also impacted by higher selling expenses as a percentage of sales due to increased sponsorship and endorsement costs, commissions, merchandise displays, and trade developments.
Comparison with peers
Larger rival PepsiCo (PEP) reported an 80 basis-point expansion in its operating margin to 18.4% in fiscal 3Q17. The improvement in the company’s operating margin was driven by favorable commodity mark-to-market adjustments and lower restructuring and impairment charges. Coca-Cola’s (KO) operating margin grew 200 basis points to 23.4% on a year-over-year basis in 3Q17. The divestiture of its lower-margin bottling businesses and the company’s productivity efforts drove the improvement in the soda giant’s operating margin.
Let’s discuss Monster Beverage’s valuation in the next part of this series.