Keurig Green Mountain: Price Estimate Revised To $72 As Uncertainty Prevails Regarding Keurig Kold & Keurig 2.0

The Vermont based K-Cups maker, Keurig Green Mountain (NASDAQ:GMCR), has been reporting dismal performance over the last couple of quarters, primarily affected by the lower brewer and accessory sales. For the last three quarters, the brewer volumes have declined significantly, including the negative impact due to recalls on certain MINI plus brewers, as well as uncertain consumer perception about Keurig 2.0.  As a result, GMCR’s stock has declined nearly 50% since the onset of this year, and is currently trading at around $70, much below its 52-week high.

A continuous drop in the brewer volume over the last three quarters, especially in the holiday season; the unimpressive launch of Keurig 2.0 hot brewer platforms, and a delay in the launch of Keurig Kold, have made investors wary of the company’s near term financial growth. Accordingly, Trefis has updated the price estimate for the company’s  stock, lowering the brewer volume sales for the year 2015 and 2016. Moreover, the recent updates in the Keurig Kold segment further brought down the price estimate for the company.

We have a $72 price estimate for Keurig Green Mountain, which is roughly 3% above the current market price.

See our full analysis of GMCR here

Struggling Brewer Sales

Keurig Green Mountain has been witnessing year-over-year (y-o-y) declines in the brewer volume sales over the last three consecutive quarters. In the Q4 2014 fiscal quarter, the company’s brewer and other accessory sales declined 5% to $180 million, primarily due to an 8% decline in the brewer volume sales and 11% decline in brewer pricing. ^[1] Moreover, the launch of Keurig 2.0 was unimpressive as most of the customers were confused about the details and specifications of the new brewers, leading to lower brewer sales in the December-ended quarter as well. In Q1 2015, brewer and accessory sales declined a massive 18% y-o-y to $307 million, with volume down 12% to 4.5 million brewers. ^[2] The sluggish performance of the brewer segment forced the company to have low expectations for the March-ended quarter, despite strenuous efforts for improving the consumer perception about the new hot brewer platform.

In the calendar year 2014, Keurig Green Mountain sold 10.3 million brewers. According to updated Trefis estimates, the annual brewer volumes might just reach 10.82 million by 2016, with an annual growth rate of 2.5%.

Keurig Kold Launch Delay

The Keurig Kold machine- the cold brewer platform- is one of the most awaited products in the industry right now. Last year, Keurig joined hands with Coca-Cola to come up with a cold beverage platform for at-home users. In May 2015, Keurig Green Mountain held a special investor presentation for its new cold brewer product, where the company mentioned that the Keurig Kold will be launched nationwide in a 4 phase process. In the phase 1, which will be starting in the fall of 2015, the Kold brewers and related products will be launched on online platforms, and the rest of the three phases will be concerned with the expansion of the product in retail stores. The last phase, which is expected to be over by the holiday season of 2016, includes the completion of the Keurig Kold expansion in retail stores nationwide. ^[3]

Furthermore, the company is entering an already crowded market through this product, with tough competition from SodaStream and other local brands. The delay in the set-up of Keurig Kold products on shelves of the retail shops nationwide not only created some doubts among investors, but also disappointed the related consumers. As a result, Trefis updated the forecasts for the segment’s revenue drivers. According to our estimates, the company might be able to sell roughly 0.4 million Kold brewers in 2016, and 37.5 Kold K-Cup packs per brewer in 2016.

The combined effect of the negative sentiments among the investors and consumers, as well as declining brewer sales led to a revised price estimate for the company. However, to revive the brewer sales, Keurig announced the addition of Keurig 2.0 K200 series to the family of Keurig 2.0 hot brewer systems, at a retail price of $120-$130. K200 brewers can brew both a single cup and four-cup carafe. ^[4] It will be interesting to watch the company’s performance in the June-ended quarter, when the company releases its Q3 report next month.

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More Trefis Research

1. Keurig Green Mountain FY 2014 earnings conference call [↩]
2. Keurig Green Mountain earnings call transcript [↩]
3. Keurig Kold Investor Presentation [↩]
4. The Keurig 2.0 brewing system lineup expands with the addition of the new K200 series [↩]