Keurig Green Mountain Q3 2015 Earnings: Stock Plunges On Weak Brewer Sales & Lowered Guidance

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GMCR: Keurig Green Mountain logo
GMCR
Keurig Green Mountain

Keurig Green Mountain’s (NASDAQ:GMCR) stock collapsed nearly 30% after the company reported poor sales growth and lowered its guidance in its Q3 2015 earnings results. The company managed to just meet the market EPS estimate, but fell short of the revenue estimate by nearly $70 million. The important thing to notice in the whole earnings report is that the company reported sluggish results in all the operational, as well as geographical, segments. Keurig reported a decline in sales and volume in Pods (portion packs), Brewers and accessories; as well as in other products. With all the segments lagging in performance, the company lowered its guidance. [1]

  • Net sales guidance for the fiscal 2015 has been changed to ‘decline by low-single to mid-single digits compared to year 2014’ from the previous target of flat to low-single digits growth
  • Non-GAAP EPS is now estimated to decline in the low-teens, further down from the previous estimated decline in mid-single digits
  • Estimated Capital investment has been changed from $425-$475 million to the range $400-$450 million

This is the second time that the company has lowered its net sales guidance in the fiscal year 2015, which raises many questions about the company’s near-term growth. One of them, perhaps the major one, which is of great concern for investors, is regarding the declining brewer sales volume. Another concerning factor is the uncertainty regarding the timeline of Keurig Kold’s release in the market. Both the factors together have been troubling investors and that can be seen in GMCR’s stock performance. GMCR’s stock has plummeted nearly 60% since the start of the year from $132 to $54.

gmcr stock

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We have a $60 price estimate for Keurig Green Mountain, which is roughly 11% above the current market price.

See our full analysis of GMCR here

Decline In Pods Sales Adds Up The Pressure

In Q3 2015, Keurig’s net sales in the Pods (portion packs) category declined 1% year-over-year to $815 million, due to stiff competition in the pods category, and lower than expected performance in the digital segment, by some of the partner brands. Although pods volume growth in the U.S. measured channels remain strong, the weakness in the unmeasured channels was enough to offset the net growth. In the U.S., the company’s at-home pod volumes grew 12% in the third quarter, driven by the entry of more unlicensed brands and retail expansion of Dunkin’ Donuts. [2] However, the away-from-home category in the country witnessed more than 20% decline in the pods volume, as the competitors increase promotions. [3]

As a result, Trefis updated its forecast for the segment and expects the equivalent servings (K-Cup portion packs) volume growth to just round up to 7% y-o-y in the year 2015.

This small snag in the Pods segment further adds up the pressure for Keurig, who is still struggling from the declining market share in the brewer category. The company has always been known for its highly innovative and technologically advanced hot brewers. However, the core product of the company is facing continuous decline in volume sales, with 18% decline in the brewer sales volume in the third fiscal quarter, making it the fourth consecutive quarter with a brewer sales volume decline. (ref: 1) Due to high levels of inventory at retail stores and restocking of the MINI brewers, which were recalled during the holiday season of 2014, the company experienced a decline in volume sales.

The company expects the Keurig 2.0 brewer sales to accelerate in the coming few months, after positive reviews to the launch of the K200 line. Moreover, the company is coming up with several new varieties of brewer models across various price points. However, much of the damage might be done to the brewer volumes for the year, and Keurig’s efforts might see positive results after the holiday season of 2015. As a result, Trefis estimates the Brewer volumes to grow merely 2% to 10.5 million in the year 2015. However, the higher pricing of the new brewers might just improve the average price per brewer ratio for the year 2015.

Apart from these major segments, the company also witnessed 22% y-o-y decline in the accessory sales and 12% y-o-y decline in other product sales, which include sales of packaged coffee. As a result of the combined impact of all the current headwinds faced by the company, Trefis updated its revenues forecasts for the company from $5.5 billion to $5.18 billion for the year 2015.

Keurig Kold Is Ready For Launch

Keurig Kold – the cold brewer machine – is all ready to be launched this fall, as Keurig prepares itself to enter into the cold beverage market. The only concern among the investors, and disappointment among the users, is that the product is being launched initially on the online platforms only, with no exact timeline for its introduction to retail stores. [4] The key brands that would be available during this initial launch includes Coca-Cola, Diet Coke, Coke Zero, Sprite, Fanta, Dr Pepper, and Canada Dry, along with some of the company’s own carbonated and non-carbonated brands, with optimum brand mix. Keurig will start shipping the product in late September or early October.

Since the announcement that the product is initially being launched online only, we have updated our forecasts and now estimate the Keurig Kold brewer volume to just reach 0.1 million by the end of this year.

Nonetheless, lower guidance for the fourth quarter and for the entire fiscal year 2015 leaves investors with high hopes for the Keurig Kold.

Earnings Takeaways:

  • Net Sales decline 5% y-o-y to $970 million
  • Non-GAAP EPS of $0.80, and GAAP EPS of $0.73
  • Brewer and accessory net sales declined 26% y-o-y to $95 million, driven by 18% y-o-y decline in brewer sales volume
  • Gross margins decline 750 basis points to 36%

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Notes:
  1. Keurig Green Mountain, SEC filings, 8-K, Q3 2015 []
  2. Dunkin’ Brands, The J.M. Smucker Company and Keurig Expand Partnership []
  3. Keurig Green Mountain, Q3 2015, earnings call transcript []
  4. Keurig Kold Investor Presentation []