Green Mountain Revenue Jumps On K-Cups, Brewers Sales But Margins Are Thinner

by Trefis Team
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Trefis
GMCR
Green Mountain Coffee Roasters
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Green Mountain Coffee Roasters (NYSE:GMCR) announced its Q4 and fiscal 2012 earnings on Tuesday as the company surprised the market with its impressive set of numbers. Total revenues surged 33% to $946 million helped by strong single serve pack and brewer sales. The company also benefited from an extra week in its accounting which added $90 million to the top-line.

Revenues for its single serve packs (mostly K-Cups) jumped 47% to $700 million helped by a 50% rise in volumes offset partly by a weaker pricing and product mix. Green Mountain’s net income rose 20% to $92 million. The management is confident of posting a 15-20% revenue growth for the upcoming fiscal. The news cheered the investors as the stock jumped 25% in the after hours trading.

Brewer Volumes Rising Again

Green Mountain sold a total of 2 million brewers in the quarter, up 20% on a sequential basis. Brewer unit volume sales peaked at 4.2 million units in the Oct’11-Dec’11 quarter but dived sharply to 1.3 million units in the next quarter. Since then, the company has done well to rebound the brewer volumes.

However, amid all the ebullience, it is important to note that Vue sales (brewers and packs combined) halved to $9.6 million from $20.0 million in the third quarter. This is detrimental to the company’s future profitability in a couple of ways:

(a) Vue brewer is positioned as a premium product and is priced much higher than the traditional brewers. The original Keurig K-Cup brewers were generally sold at price close to its cost to increase the brewer adoption rate and were themselves not profitable. Low adoption of Vue brewers would imply a loss of an opportunity to generate profits through the sale of brewers.

(b) Any third party company which wants to introduce its Vue packs will have to pay royalties to Green Mountain (unlike that for K-Cups). Thus, lower adoption rates would also imply an opportunity lost to generate additional royalty revenues.

See our full analysis of GMCR here

Margins Getting Squeezed

Gross margin decreased to 33.4% vs 35.7% in the previous year quarter. The company attributed the decline primarily to a rise in manufacturing costs and investments related to the introduction of Vue. Furthermore, we expect the gross margins to erode further as the effect of patent expiration takes place from the first quarter of the fiscal 2013 (i.e. from October 2012).

Two of the company’s patents expired in September which paved the way for other competitors and private labels to introduce their own, lower priced K-Cups without having any sort of an obligation to pay royalty to Green Mountain. The magnitude of decline will determine how much pricing the company’s own single cup packs can sustain in an intensely competitive environment.

We have a price of $29.40 for Green Mountain Coffee Roasters, but are in the process of revising our estimates to incorporate the latest earnings.

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