Green Mountain’s Profits Jump On Higher Volumes And Lower Coffee Costs

51.24
Trefis
GMCR: Keurig Green Mountain logo
GMCR
Keurig Green Mountain

Green Mountain Coffee Roasters (NASDAQ:GMCR) announced solid fourth quarter earnings, helped by strong  K-Cup and brewer volumes. Total revenues for the quarter rose 11% to $1.05 billion while the net income swelled to $127 million or 83 cents a share vs 58 cents a share in the previous year quarter. For fiscal year 2013, the company generated a non-GAAP earnings of $3.39 per share. For the upcoming fiscal year, the company expects an earnings of $3.75-3.85 per share on high single digits revenue growth. [1]

Following the earnings release, we have revised our price estimate for Green Mountain Coffee Roasters to $69, which is about 10% higher than the current market price.

Margins Improve Again

Relevant Articles
  1. Scenarios That Can Impact Keurig Green Mountain’s Stock
  2. Scenario: Is This The Stagnation Stage For Keurig Brewers?
  3. Dull Keurig 2.0 Launch & Brewer Recalls Hamper Keurig’s Revenue Growth In Q1
  4. New Brewer Platforms To Drive Keurig Green Mountain’s Growth In 2015
  5. Dr Pepper Snapple- New Addition To Keurig Green Mountain’s Arsenal
  6. The Year 2014 In Review: Keurig Green Mountain

During the fourth quarter, the company’s gross margins jumped 240 basis points to 36.0%, primarily due to low coffee prices globally. For fiscal 2013, margins have risen 430 basis points to 37.2%. Green Mountain has already secured the coffee supply for the next fiscal year due to which the company sees a further improvement of 100 basis points in its gross margins.

Volume Growth Impressive

The company continues to defy its skeptics who believe that the K-Cup volume growth will eventually slow down once the private labels command a greater presence at the supermarket shelves. During the quarter, K-Cup volumes surged 29% during the quarter (year-over-year) to take the full year tally to 26%. A word of caution though – previous year’s results have been adjusted to exclude the effect of the extra week (Excluding the effect of the extra week, volumes were up 17%).

However, the gain in volumes did come at the expense of pricing as sales from K-Cups could manage to rise only 23%. With increased competition, there was always going to be pressure on pricing,  but overall Green Mountain is playing the pricing vs volumes game well at the moment. Two of the company’s patents expired in September last year, opening the doors for private labels to introduce their own K-Cups, without having any obligation to pay royalty to the company.

Brewer sales surged 30% to 2.5 million units, helped by 73,000 additional unit sales at Hilton Garden Inn. After dominating the at-home market, Green Mountain sees a potential to boost sales in the away-from-home category. Prior to this quarter, brewer sales had already begun to stagnate and the company sees a room for improvement in this department. The Vue brewers haven’t sold at a pace the company had envisioned. In fact, Green Mountain wrote down a one time charge of $20 million related to excess Vue inventory. A higher price point and stickiness associated with traditional brewers are the reasons why consumers are wary of switching to Vue brewers.

Beginning from next fiscal year, Green Mountain will launch a new brewer platform known as Keurig 2.0 that aims to combine the features of the traditional Keurig brewers and the Vue brewers. Moreover, both K-Cups and Vue packs will be compatible with the new brewer. If successful, this could really increase Green Mountain’s bottom line because the new brewer platform would have its own set of patents.

As a result, only those third party companies that pay a royalty to Green Mountain will be able to introduce their single cup serves. Apart from the increased royalty revenues, this will also lower the competition for the company from private labels, which could result in better K-Cup pricing. The Keurig 2.0, along with Keurig Cold and Keurig Water, is part of the trio of new brewer platforms that the company plans to eventually launch by 2015. [2] In addition, the company also aims to introduce its brewer systems in international markets such as the U.K., Australia, South Korea and Sweden. We could very well see the brewer volumes surprising the markets next year.

See our full analysis of GMCR here

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. GMCR 8-k []
  2. Keurig 2.0 Is Coming. Are you Ready?, September 11, 2013, singleservecoffee.com []