Can Keurig 2.0 Turn The Story For Keurig Green Mountain In Q3 2015?

Keurig Green Mountain (NASDAQ:GMCR) is scheduled to release its Q3 2015 earnings report on August 5, 2015. ^[1] With all eyes on the brewer sales for the June-ended quarter, investors are waiting to see if the Vermont-based K-Cups maker can beat its market estimates of $0.79 EPS and $1.04 billion in revenues. ^[2] Three consecutive quarters of poor brewer volumes, an unimpressive launch of Keurig 2.0, as well as a delay in the launch of Keurig Kold to retail stores nationwide, made investors skeptical about the future growth of the company. As a result, GMCR’s stock plummeted more than 35% over the last 3 months and is currently trading close to $75.

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% below the current market price.

See our full analysis of GMCR here

In Q2 2015, the company repeated its tragic scenario with a massive 23% year-over-year (y-o-y) decline in the brewer and accessory sales to $106 million, driven by a 22% y-o-y decline in sales volume. This major drop in brewer volume offset the 7% y-o-y increase in sales of portion packs, and consequently, the net sales witnessed a mere 2% y-o-y increase to $1.127 billion in Q2 2015. ^[3]

Can Keurig 2.0 Boost The Brewer Sales?

Keurig Green Mountain has been known for its dominance in the single-serve coffee segment, with its innovative technology and high popularity of K-Cups and brewers. Now, when a company’s core product faces decline in demand, it is an alert signal. Among the many reasons leading to lower brewer volume sales, the difficulty in the shift from Keurig’s old brewer to the new version Keurig 2.0 is the primary reason. After the launch of Keurig 2.0 last year, the company faced delays in putting the new packs on the retail shelves. Furthermore, the consumers were unclear about some of the details of the new brewer, and that made some of them not shift to the new version. To add fuel to the fire, certain MINI plus brewers were recalled during the holiday season of 2014. (See: The story repeats in Keurig’s Q2 earnings report, as brewer sales disappoint)

To clear up the misperception, the company prepared a more effective packaging, which will communicate the details and features of the product more clearly to the customers. Furthermore, to increase the brewer sales for the holiday season, the company is planning on bringing the ‘My K-Cup accessory’ back to the market, which will allow the users to brew any coffee of their choice. However, these initiatives will take a couple of quarters to show some impact on the financial performance of the company. Effectively, the brewer sales come down to the performance of Keurig 2.0.

Keurig Green Mountain expects a flat to low-single digits growth in the net sales in the third quarter of the fiscal 2015. In the calendar year 2014, Keurig Green Mountain sold 10.3 million brewers. According to Trefis estimates, the annual brewer volumes might just reach 10.82 million by 2016, with an annual growth rate of 2.5%.

Keurig Kold: The Wait Is Killing Everyone

Being one of the most awaited products in the market, Keurig Kold might be a game-changer for Keurig Green Mountain. However, the delay in the initial launch of the product is hampering the excitement among the customers and investors. In May 2015, Keurig Green Mountain held a separate 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. ^[4]

The extended timeline for the product’s placement on retail shelves is the primary reason for disappointment among investors. The real picture of customers’ initial response to the product will be clear only after the product is available online in the fall of 2015. 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. Below is our forecast for Keurig Kold revenues.

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1. Keurig Green Mountain, Q3 2015, earnings conference call [↩]
2. Keurig Green Mountain, Q3 2015 analyst estimates, Yahoo Finance [↩]
3. Keurig Green Mountain Q2 2015, earnings call transcript [↩]
4. Keurig Kold Investor Presentation [↩]