Green Mountain Coffee Profits Jump But Brewer Volumes A Worry

Benefiting from lower coffee prices, Green Mountain Coffee Roasters‘ (NASDAQ:GMCR) net income for the third quarter jumped 59% to $116.3 million or about 76 cents a share. Total revenues were up 11% helped by growth in K-Cup volumes but partially offset by lower brewer sales and reduced royalty revenues. For fiscal 2013, the company expects net income of $3.19 to $3.24 per share on revenue growth of 13% to 14%. ^[1]

See our full analysis of GMCR here

Margins Expand

Green Mountain benefited from lower coffee costs with gross margins up 720 basis points to 42.1%. Arabica coffee prices have plummeted in the last twelve months and are trading at near three-and-a-half year low. However, the full year margins are likely to be lower as the demand for brewers are seasonal in nature.

Brewer sales typically swell during the onset of winter. Therefore, they will account for a greater proportion of total sales in the full year income statement than they have in the latest quarter. Since brewers are a low margin product, the full year margins will be negatively impacted.

Note that there are primarily two types of coffee: arabica and robusta. The former is considered a grade above the latter. Green Mountain exclusively serves arabica coffee. The primary reason why coffee prices have plunged is due to a weak macroeconomic environment in Europe. The region is the biggest consumer of coffee in the world.

K-Cup Volume Jumps

K-Cup volumes were up 21% but the pricing was down 3%. There were concerns that Green Mountain’s K-Cup volume would plummet after some of its patents expired last year. The patent expiration opened the doors for private labels to introduce their own K-Cups, with no obligation to pay royalty to the company.

Nevertheless, the company has done pretty well to balance volume vs pricing of its K-Cups. Through the three quarters of the fiscal, the volume of the coffee pods is still up ~24%. As the volume base gets bigger, the rate of growth is likely to slow down in the future. A strong K-Cup sales growth is critical as GMCR derives most of its profits from the sale of coffee pods. The brewers are sold at very low margins in order to boost the adoption rate.

Brewer Sales Under Pressure

Revenues from the sale of Keurig brewers fell 4% due to flat brewer volumes. Green Mountain has been trying to allure customers towards premium (and more profitable) brewers such as the Vue and the Rivo but it doesn’t look like the company has been too successful till now.

The Keurig brewer volumes tanked 9% in the second quarter, and a continual decline in volumes doesn’t bode well for the long term prospects of the company. After all, you could argue that the higher the number of brewers sold, the higher the number of coffee pods that are likely to be sold.

We have a $66 price estimate for Green Mountain Coffee Roasters. However, we are in the process of revising our estimates in order to incorporate the latest earnings.

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1. GMCR 8-k [↩]