Green Mountain Sales Slow Down But Earnings Overshadowed By Coca-Cola Stake Acquisition

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GMCR: Keurig Green Mountain logo
GMCR
Keurig Green Mountain

Green Mountain Coffee Roasters (NASDAQ:GMCR) released its first quarter results Wednesday, February 5, but the earnings release was overshadowed by the news of Coca-Cola’s acquisition of a 10% stake in the company. [1] Coca-Cola values the company at $12 billion, which sent Green Mountain’s shares soaring 45% in the after hours trading.

Keurig’s brewers provide a new outlet for the consumption of Coca-Cola products. The beverage giant is struggling to grow its operations in the U.S., as consumers ditch fizzy drinks in favor of healthier alternatives such as sports drinks, energy drinks and also coconut water. Big, mature companies are also looking towards coffee as the next growth segment. Late last year, McDonald’s announced its decision to sell packaged coffee at its stores and at retail giants. It is also looking to increase its focus on coffee specialties at its outlets.

We have a $69 price estimate for Green Mountain Coffee Roasters. We are in the process of revising our estimates in order to incorporate the latest earnings.

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Guidance Unchanged

During the quarter, Green Mountain’s revenues rose 4% to $1.39 billion, while the operating income jumped 22% to $238 million (Non-GAAP). The company generated a net income of $146 million, or 96 cents a share vs 76 cents a share in the previous year quarter.  For fiscal 2014, the company still expects to earn $3.75-3.85 per share on high single digits revenue growth. [2]

Margins Expand

Gross margins, as expected, improved 220 basis points on a year-over-year basis, primarily due to lower cost of raw materials. Favorable coffee costs benefited the company to the tune of 390 basis points but weaker pricing eroded some of the margin gains. Margins in the first quarter are usually lower than the full-year margins since this quarter tends to have a higher proportion of brewer sales within the overall revenues. Green Mountain sells its brewers at very low margins in order to boost the adoption rate.

Arabica coffee prices declined 23% in 2013, but has jumped more than 20% since the start of 2014, in anticipation of drought in Brazil. [3] However, since coffee companies usually keep their supply hedged through futures contracts, the impact of any rise in commodity prices is likely to be felt later. In the near term, margins should continue to remain near the higher end of the historical range.

K-Cup Volume Growth Slows Down

K-Cup volume growth slowed down to 12%, a drop in pace from the 29% surge during the previous quarter. Moreover, there was a further 2% deterioration in pricing. Green Mountain is having to battle against private companies, now that its patents have expired. Till now, Green Mountain had done well to post strong volumes despite the increased competition. However, the latest quarter suggests that sales of competitors might be beginning to gain traction.

Volumes of single pack servings could once again accelerate after the company launches Keurig 2.0 later this year. Only those companies that have royalty agreements with Green Mountain will be able to release their single serve packs (i.e. those compatible with Keurig 2.0). This will restrict the entry of private labels and other third-party companies. Not only can this boost volumes, it can also help the company realize better pricing.

Both K-Cups and Vue packs will be compatible with the new brewer. Moreover, users will also be able to brew up to three cups in a single go. Later on, Green Mountain will also release Keurig Cold and Keurig Water to cover a major portion of the non-alcoholic beverage industry. Thus, Coca-Cola’s products could make their presence felt in the single serve packs compatible with the upcoming brewers.

See our full analysis of GMCR here

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Notes:
  1. Coca-Cola to Buy 10% Stake in Green Mountain Coffee, February 6, 2014, bloomberg.com []
  2. GMCR Q1 8-k []
  3. Arabica Coffee Extends Rally as Brazil Seen Dry Through Feb. 20, February 4, 2014, bloomberg.com []