Celsius: The Growth Story Isn’t Over (NASDAQ:CELH)

SolStock The momentum in Celsius Holdings, Inc. (NASDAQ:CELH) has deflated with the share price collapsing nearly 60% from its $100 highs to trade at near $40 today. While it may be tempting to think that its growth story is over, Celsius remains a market share taker in a category that is experiencing some level of growth slow-down. Just how enduring this slowdown is remains to be seen. Celsius reported fairly robust results in its most recent quarter. Revenue of 402M was up 23%. However, more importantly, retail sales unadjusted for Pepsi’s inventory allocation, as measured by MULOC (Multi Unit Outlet Sales) for Celsius increased closer to 37%. CELH Investor Deck Inventory reset impact likely to be limited Celsius continues to be impacted by Pepsi’s inventory tightening, which is a reversal of the excess inventory stocking that Celsius benefitted from last year as the Pepsi Celsius Partnership was starting to scale. Still, it is reasonable to expect that even though there may be a period of further inventory tightening by Pepsi, this should eventually normalize. Celsius management themselves noted some scope for additional tightening this quarter, even though the inventory adjustment last quarter came in lower than expected. US Category Growth Experiencing Softness Beyond the ongoing inventory adjustments, what appears to have the market concerned is general softness in the energy drink category in the US, which is not specific to Celsius. After experiencing net growth this time last year, both energy drink volumes and sales have been in decline for much of this year. In fact, Nielsen has been reporting energy drink volume declines of nearly 2% during much of July. Larger peer Monster Beverage Corporation (MNST) is seeing sales volume decline closer to 4% through July. Still, Celsius continues to grow both volume and sales at higher than industry rates, most recently logging 16% volume growth per Nielsen for in-store sales in July. This suggests that the business continues to actually take a greater share, and is at least holding its own. So what is ailing the energy drink industry growth and when is this likely to reverse? The fundamental issue appears isolated to a convenience store (or c-store) foot traffic. Both Monster and Celsius recently alluded to consumer pressures impacting total visit numbers to convenience stores, with total trips down. Given that the majority of energy drink purchases occur at convenience stores, this is having an outsize impact on sales and sales volumes for the sector holistically. Notably, Celsius top-line growth deceleration doesn’t appear to be a Celsius brand issue – or a category issue – it’s likely more holistically a distribution channel issue that is impacting the category- albeit temporarily. The strong consensus from category analysts is that energy drink growth will resume and that energy drinks will likely even pull volume from other carbonated beverages. C-Store Promotional Activity Still Yet to Commence Even though Celsius is growing above market, Celsius growth rates are likely meaningfully understated at present, given a range of interrelated factors. Celsius was a major beneficiary of C-Store resets that have taken place over the summer. In fact, nearly 80%+ of C-Store owners were reported to have given Celsius more shelf space during the reset process, with Celsius noting 35% more in-store shelf space. This store reset will provide Celsius far more visibility in store, and reduce stock out risk of insufficient inventory in store. However, the planned timing of the full resets was delayed by several months which not only deferred the favorable impact of additional shelf space for Celsius, but which had some flow-on effects on Celsius’s promotion and marketing schedule. During the earnings call, Celsius management noted that “there were some delays in some of the resets which also delayed some of our promotional activity, but we’ve got a really good promotional incentive calendar in Q3 and Q4 in the back half of Q3 and throughout Q4.” Conversely, larger competitors (specifically Red Bull) have had new product launches accompanied by an aggressive promotional schedule which have had the effect of blunting the velocity of Celsius share gains. This should be reversed once promotion activity resumes. International Ramp Just Starting Celsius international revenue is still small at just $20M, but it’s now growing 30%. While there wasn’t a lot of color provided on the recent earnings call about how international efforts are proceeding, Celsius previously noted that efforts in Canada are proceeding better than expected. Celsius has also managed to make some inroads in the UK and Ireland markets, where volumes are now being distributed in major grocery retailer Tesco as part of a ‘meal deal’ offer. Australian and France launches remain on track for later this year. Non C-Store Distribution Still Appears Strong The other strong indicator pointing to Celsius’s challenges being temporary and C-Store channel related is non C-Store channel activity continues to be strong. Amazon’s channel revenue of $40M was up 41% annually. Celsius retained the #1 and #2 products in the energy category through August. Club channel revenue of $88M (from Costco and others) increased 30%. This points to still very strong growth for the brand, coming on the back of comparable sales growth last year of > 100%. Celsius has also been making measurable strides in penetrating the food service space, an opportunity facilitated by Pepsi for the business. Nearly 12.4% of all Celsius sales came from the food service channel last quarter. This is up meaningfully from just 11% of sales during the same period in 2023, and comes on the back of expansions into Jersey Mikes and Dunkin stores that have started to scale. New Products in 2025 Celsius alluded to new product opportunities on its earnings call. While details were a little light on what these new lines could be, Celsius has in the past referenced its desire to push into Celsius-branded waters and food-related products (such as Energy Bars). Celsius has purchased Func Foods which provided a range of food-related products which it ultimately didn’t meaningfully scale. However, it shows interest in this product category. It’s also likely that Celsius pursues a range of lower caffeinated products to better segment the market and attract consumers desiring caffeine, though at more moderated levels. Competitors such as Alain Nu have already gone down this path, and Celsius will have to follow. Celsius will also no doubt continue its aggressive launch and release cadence of new flavors. The company has north of 25 flavors and is releasing new ones at an aggressive rate. Celsius management noted 2025 as the marker for when new products could be expected to hit the market. Long Term Opportunity Celsius ended the quarter with a retail market share of 11.4%, which slightly increased compared to the last quarter. However, in the bigger picture, Celsius retains a nearly 22% market share on Amazon’s share, which is roughly level with Monster at 21% and meaningfully higher than Red Bull (13.6%). CELH Investor Deck Ultimately Celsius management believes they can bridge the online to off-line gap between 22% share on Amazon and 11% in in-store retail. On the earnings call, they specifically noted “we currently have 16 markets that are above or within two points of a 15 share”. The bullish thesis on the business comes down to a belief that they can continue to close that gap, and I saw nothing this quarter to change my belief here. Risks The major risk that I see with the Celsius investment case from here is a shift in consumer preferences that dampens overall growth in the energy drink vertical. That would certainly be more problematic as Celsius would then be fighting with incumbents over diminishing market opportunity. Health and regulatory risks also remain top of mind. There have been several studies that have kicked off evaluating the health effects of energy drinks, particularly whether they can be linked to a higher incidence of cancer. Adverse findings here could shift consumer preferences or even lead to tougher mandates for labeling and regulation of the sector. Finally, more subtle shifts toward lower caffeinated products could also leave Celsius exposed vs. competition. Concluding Thoughts With the meaningful re-rating in Celsius stock, the business now trades at ~35x NTM earnings for a company with consensus earnings per share growth of 30% for the next few years. That seems pretty cheap, particularly if this thesis holds that what ails Celsius currently is isolated to a specific channel issue in the C-Store space that is largely macro-related, with limited foot traffic into the store and not industry-specific, which will reverse itself as the macro situation improves. Should this play out, I expect growth will once again approach levels that Celsius is seeing in other channels such as online, and that analysts’ current estimates may well prove too conservative.

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