Green Mountain Coffee Roasters (NASDAQ:GMCR) announced its Q1 results for fiscal 2013, helping mitigate the uncertainty surrounding the patent expiry on its K-cups in September 2012. Total revenues rose 16% to $1.34 billion buoyed by strong growth of its single serve packs. The company reported net income of $107.9 million or 70 cents a share, up from 66 cents a share. Green Mountain’s management reaffirmed its previous guidance of generating sales growth of 15-20% for fiscal 2013 but warned that a moderation of growth in the overall coffee and espresso market could slow down its top-line in the near term. ((GMCR10-Q))
Margins Show Resilience
Gross margins jumped to 31.3% from 29.1% in the prior year period helped largely by lower coffee costs. Although margins have improved on a year-over-year basis, they were down 210 basis points on a sequential basis. Comparing on a sequential basis would give a good idea of the kind of margins the company can sustain in the long run now that the market has been flooded with inexpensive private labels.
Two of the company’s patents expired in September last year which paved the way for other competitors and private labels to introduce their own, lower priced K-Cups without having any sort of obligation to pay royalties to Green Mountain. The winter months tend to swell the sales of lower margin brewers and part of the reason why gross margins have declined on a sequential basis is because of a greater proportion of brewer sales. Therefore, Trefis estimates the company has done a good job of holding on to its pricing while generating impressive sales growth in the wake of rising competition. Green Mountain’s single serve packs (i.e. K-Cups and V-Packs) jumped 26% over the previous year quarter. 
It is important to remember that the K-Cup product is the company’s cash cow and therefore any deterioration in its pricing will adversely affect its profit generating ability. Green Mountain hardly makes any money through the sale of its Keurig brewers since the company often sells them at cost price in order to boost its adoption rate. The company is trying to change that with the introduction of premium, more expensive brewers such as the Vue and the Rivo. Vue sales did not pick up as envisioned and halved to $9.6 million in the previous quarter. The company did not report its sales this quarter. 
Royalties declined 12% which was hardly surprising since the private labels are under no obligation to pay royalties for the K-Cups to the company now. However, Green Mountain still derives royalty revenue from third party companies who use its patented technology in their brewers. This is the reason why we think that royalty revenues will not collapse going forward.
We have revised our price estimate for Green Mountain Coffee Roast to $36, which is about 20% below the current market price.Notes: