Keurig’s Q2 Earnings Preview: Brewer Sales Volume Remains Key Driver

Keurig Green Mountain (NASDAQ:GMCR) is scheduled to release its second quarter earnings report for the fiscal 2015 on May 6. ^[1] Brewer product recalls and a poor customer response to the new Keurig 2.0 led to a weak holiday period in terms of sales of brewers and other accessories; the brewer and accessory sales declined 18% y-o-y to $307 million in Q1. Keurig reported net Q1 revenue of $1.38 billion, in-line with the net revenues in the same period the previous year. On the other hand, in the first quarter, portion pack net sales rose 9% year-over-year (y-o-y) to $1.012 billion, primarily due to the 13% y-o-y increase in volume sales of portion packs. ^[2] The Vermont based K-Cups maker plans to release its new cold brewer, Keurig Cold, this year. Additionally, the company has been joining hands with several retail and food chains, for the manufacturing and distribution of some coffee brands in the K-Cups.

We have a $103 price estimate for Keurig Green Mountain, which is roughly 8% below the current market price.

See our full analysis of GMCR here

All Eyes On Brewer Sales Volume

Keurig Green Mountain has witnessing a decline in the brewer sales volume for the last 2 quarters. In the September-ended quarter, brewer sales declined 5% y-o-y in the fourth quarter, due to a decline in brewer volumes by 8% and brewer pricing by 11%. Furthermore, the company sold nearly 4.5 million brewers in the first quarter of fiscal 2015, down 12% (600,000 brewers) y-o-y. The weak brewer sales in the holiday season also included the negative impact of a recall on certain MINI plus brewers, and greater than expected retailer portion pack inventory reductions. The company mentioned that it was expecting a decline in the brewer sales year-over-year (y-o-y) due to the low promotional price points last year. However, the decline was more than the expectations due to the voluntary product recall. Replacing the product on retail shelves led to unexpected expenditure by the company in the Q1, and it is expected to hamper the revenue growth in the second quarter as well.

Moreover, Keurig 2.0’s launch was fairly unimpressive because of the two major reasons — firstly, the delay in putting the new packs on the retail shelves, and secondly, consumer perception about Keurig 2.0. Most of the customers were unclear whether the new version of Keurig brewer would brew all their favorite brands. This confusion added to the decline of the brewer sales in the holiday period.

Despite the lower expectations, the company’s overall financial performance in the second quarter depends mostly on the Keurig Brewer volumes.

Expectations Rise Before Keurig Cold’s Launch

Keurig Cold, the company’s cold brewer platform, is designed to dispense single servings ranging from carbonated drinks to non-carbonated beverages, such as juice drinks and iced teas. Moreover, Keurig added Dr Pepper Snapple (NYSE:DPS) as another beverage partner, when the two companies joined hands in developing a selection of Dr Pepper Snapple’s brands for the upcoming Keurig Cold Platform. Adding Dr Pepper Snapple’s brands to its arsenal gives Keurig an additional option. The partnership between the two companies now provides an additional consumption platform for select Dr Pepper brands and could possibly raise sales.

On the other hand, in December, Keurig announced yet another deal, when it entered into an agreement to acquire the remaining 85% equity of Bevyz, a fully owned subsidiary of MDS Global Holding Ltd., in the first week of December 2014. ^[3] The Bevyz Fresh machine has a completely different technology, as it is compatible with both hot and cold beverages such as carbonated soft drinks (CSD), frappes, juices, teas, energy drinks, and coffee.  An all-in-one machine replaces the need for separate appliances and could attract consumers based on its convenience and counter-top space optimization. With the company’s strategy of adding partners to its list of licensed brands, we can expect Keurig to join hands with more beverage companies in the coming months, before the launch of this awaited product, as the company might be trying to avoid a lackluster launch as in the case of Keurig 2.0.

K-Cup Sales To Strengthen Keurig’s Top-line Performance

In Q1 2015, Keurig’s portion pack sales rose 9% y-o-y to $1.012 billion, primarily driven by 13% y-o-y increase in volume sales of portion packs. Recently, Keurig expanded its partnership with Dunkin’ Brands and J.M. Smucker Company, after signing agreements for manufacturing, marketing, and distribution, as well as sale of Dunkin’ K-Cups at retail chains in North America. ^[4] Apart from this deal, the company also signed multi-year deals with DS Services of America, a subsidiary of Cott Corporation (NYSE: COT), as well as Reily Foods Company for the manufacturing and distribution of some of the coffee brands, such as Javarama coffee, New England Brand coffee, New Orleans Famous French Market brand coffee, and Luzianne brand iced-tea pods for its hot brewer platform. ^{[5] [6]}

All these deals indicate the company’s intent to expand the list of its licensed coffee brands to be served in the K-Cups or other portion packs. With some popular brand names under its arsenal, the additions of these names might increase the customer base for the company. According to Trefis estimates, K-Cups portion packs segment accounts for more than 70% of the company’s valuation. A boost in the sales of these portion packs might certainly drive the company’s overall revenue growth.

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1. Keurig Green Mountain, Q2 2015 earnings conference call [↩]
2. Keurig Green Mountain, Q1 2015, earnings call transcript [↩]
3. Keurig Green Mountain to acquire Bevyz Global Ltd. [↩]
4. Dunkin’ Brands, The J.M. Smucker Company and Keurig Expand Partnership [↩]
5. Keurig Green Mountain and DS Services announce partnership [↩]
6. Keurig Green Mountain and Reily Foods Company announce partnership [↩]