Keurig Green Mountain: Can A Positive Guidance Pull The Company Out Of Its Misery?

2015 has been a tough year for Keurig Green Mountain, and it seems like only Keurig Kold and a positive guidance can save the company’s stock from declining further. Keurig Green Mountain (NASDAQ:GMCR) is facing the consequences of its own poor operational efficiency. The K-Cup maker is scheduled to report its Q4 2015 earnings results on November 18, 2015. ^[1] Over the last 12 months, GMCR stock has plummeted roughly 72% from $157 to $44, primarily affected by the declining brewer sales, eroding single-serve market share, and unimpressive launches of its new products. The lowered guidance in the third fiscal quarter further worsened the situation. ^[2]

The three drivers that investors would be most concerned about in the fiscal 2015 earnings result are: brewer volume sales, Keurig Kold performance, and guidance for the next fiscal year.

We have a $50 price estimate for Keurig Green Mountain, which is roughly 13% above the current market price.

See our full analysis of GMCR here

Expect A Massive Decline In FY’15 Brewer Volumes

Market analysts are expecting the company to post Q4 EPS of 71 cents, down 21% year-over-year (y-o-y), on net revenue of $1.03 billion, down 13% y-o-y. ^[3] The major reason for the lower expectations is the continuous declining brewer volumes, which has affected the company’s top-line growth over the last 4 quarters. The whole scenario started  exactly one year back, when the company posted an 8% y-o-y decline in the brewer volumes in Q4 2014. ^[4] For the next three quarters, the volumes have further declined y-o-y, primarily due to the difficulty in the shift from Keurig’s old brewer to the new version Keurig 2.0.

Keurig faced a few technical as well as operational headwinds post the Keurig 2.0 launch. While on one hand, the company faced delays in putting the new packs on the retail shelves, on the other hand, 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 worsen the situation, 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)

As  damage control, the company has taken certain measures to improve the situation. To clear the misperception among the customers, the company prepared a more effective packaging, which will communicate the details and features of the product more clearly. 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. Despite these measures, we can expect another quarter of dull brewer volumes, as the damage is done.

In the fiscal 2014, Keurig managed to sell 10.6 million brewers, up 8% from the previous fiscal year. In the first three quarters of fiscal 2015, the company has sold a total of 7.26 million units of brewers. Even if we consider that the company’s recovery efforts will drive the brewer sales in Q4 and it will match last year’s figure of 2.3 million brewer sales in Q4 2014, the total will still reach 9.56 million units, which is more than 10% down y-0-y.

Keurig Kold: High Prices Might Have Hampered Sales

On September 29, 2015, Keurig launched its first cold beverage brewer that will allow its customers to make cold beverages at home. Users will be able to prepare their favorite beverages from brands, such as Coca-Cola (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS). ^[5] Although the Kold brewer was available exclusively on online platforms, the company rolled out the systems to retail stores in six more cities by the end of October 2015. Although the system is one of a kind with many advantages and varieties to offer, its initial pricing and unavailability in retail stores might turn out to be a negative.

The initial price of Keurig Kold unit is set at $370, which is much more expensive than Keurig 2.0’s most expensive range. When Keurig 2.o was released in August 2014, the initial retail price for its K500 series ranged from $190-$200. ^[6] Even then, it didn’t go down well with the average income customers, who finally settled for the rather cheaper K300 series. An asking price as high as this in the initial stages, knowing that the customers are still unhappy regarding the availability of the product on online platforms, might turn out to be a bad move. Eventually, it might lead to much slower volume sales, and the company might again have to face what it did during the launch of Keurig 2.0. (See: Keurig Kold’s high prices might outweigh its hype)

FY’16 Guidance Can Be The Only Savior

In Q3 fiscal 2015, Keurig lowered its fiscal year guidance, owing to the terrible performance of all the major operating segments.

• Net sales guidance for the fiscal 2015 has been changed to ‘low-single to mid-single digits y-o-y decline’ 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

The important thing to note is that this was the second time that the company has lowered its net sales guidance in the fiscal year 2015, raising many questions about the company’s near-term growth. With deteriorating brewer demand, decreasing market share of the company in the single-serve coffee segment, and Keurig Kold’s high prices, the investors were already on the edge, and the lowered guidance just provided them with a nudge.

Investors would be looking forward to the overall guidance for the fiscal 2016, apart from the brewer sales and performance of Keurig Kold in its first quarter. A slightly positive outlook may be enough to provide the required confidence among the investors and might drive the company’s stock, which has fallen far in the past year.

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1. Keurig Green Mountain, FY 15 Q4, earnings conference call [↩]
2. Keurig Green Mountain, SEC filings, 8-K, Q3 2015 [↩]
3. Keurig Green Mountain, Yahoo Finance, Analyst estimates [↩]
4. Keurig Green Mountain, Q4 2014, SEC filings 8-K [↩]
5. Keurig Green Mountain announces the launch of Keurig Kold [↩]
6. The future of brewing is here [↩]