In this article, we aim to begin putting some of the pieces together regarding the May 8, 2013 earnings report for Green Mountain Coffee Roasters (NASDAQ:GMCR). While this article will not serve investors as providing a full quarterly preview, it will begin to add up some of the sum of the parts regarding GMCR's business during Q2 2013 as we look at analysts' estimates and price targets as well as seasonality, pricing and daily coffee consumption rates.
First let's take a look at the average analysts' expectations for the upcoming quarterly release:
As you can see from the chart provided by Capital IQ, analysts are looking for GMCR to earn approximately $.73 a share on roughly $1.02B in revenues. With the understanding that GMCR's Q2 is typically a challenge for the company as gifting season ends, gift card redemption have run their course and seasonality starts to weigh on the company's sales, we can now look at the business at hand.
Seasonality always plays a factor in the coffee business and based on the extended winter season, one would figure it is safe to say that coffee consumption YOY remained on the rise. But let's take a closer look at the data supplied by the National Coffee Association in March of 2013. Overall coffee consumption jumped by five percentage points this year, according to the NCA National Coffee Drinking Trends (NCDT) market research study. With this increase, 83% of the U.S. adult population now drinks coffee. At the same time, daily consumption remained strong and steady at 63%, while those who drink coffee at least once per week was up slightly to 75%.
On the surface, a 5 percentage point increase seems like a healthy increase, but one should take into consideration that we are still early on in the year and we should also juxtapose this year's data with the data from 2012. In 2012, daily coffee consumption soared by seven percentage points, moving coffee solidly ahead of soft drinks, according to the 2012 National Coffee Drinking Trends study published by the National Coffee Association of USA. When taking into consideration YOY data, there seems to be a 2 percentage point deceleration in the growth of daily coffee consumption. An additional point of analysis, when taking into consideration the effects of seasonality, would be that the growth rate would have been expected to at least remain on par with the growth rate in 2012 due to the extended winter season this year. Unfortunately, what we may be seeing is the laws of large numbers beginning to rear their ugly heads as the percentage of non-coffee drinkers left in the marketplace are limited with respect to the United States population. It will be interesting to see how this data and seasonality play out in GMCR's earnings and sales results.
Now let's take a look at some of the latest price targets the analyst community has pegged for shares of GMCR. Most recently, analysts have raised their respective price targets on shares of GMCR.
Argus expects Green Mountain to benefit from recent initiatives that include introduction of its Keurig Vue Brewer and distribution of Starbucks-branded Vue packs. The firm is positive on Green Mountain's strong brands and the favorable impact from more favorable coffee prices. Argus raised their price target from $54 to $63 on March 14, 2013. Capital Ladder Advisory Group's view on this recent price target change is that while GMCR should benefit from input coffee price declines, this benefit will likely be offset based on price declines in finished product offerings at the point of sale. Additionally, the addition of Starbucks-branded Vue packs may not be enough to move the needle on margins whereby offering GMCR any substantial profitability gains due to the lower Vue brewer installed user base. One more point of interest regarding the Argus price target change; March 13, 2013 marked the second consecutive monthly price change by the firm on shares of GMCR. We would suggest that Argus is failing to adequately gauge the business of GMCR and the coffee category if the firm feels it needs to adjust its price target so frequently.
Lazard Capital also raised their respective price target on shares of GMCR in March of 2013. Lazard Capital believes Starbucks (NASDAQ:SBUX), Green Mountain and Chipotle (NYSE:CMG) have the best stock upside potential in the Restaurant space. The firm raised its price target for Green Mountain shares to $67 from $58. Unfortunately for Lazard Capital, the firm and its' analyst had not covered Green Mountain Coffee before September 7, 2012. With that in mind, they do not share the same appreciation for the ups and downs in the business cycle which have created volatility in the share price over the last 24 months. Additionally, consumer goods are a far different animal than restaurant stocks and investors should call into question the generalization of GMCR as being viewed as another restaurant stock in the eyes of Lazard Capital.
Keybanc was another firm whom recently raised its price target on shares of GMCR. On April 1st, Keybanc raised its price target on GMCR to $70 from $55 after channel checks showed that pricing was holding steady despite the emergence of new private labels in the space. By the way, this is the same firm which slapped a $120 price target on shares of GMCR in July of 2011. But let's not get off topic here as we analyze more closely what Keybanc had to say. To reiterate, the firm stated, "Pricing was holding steady despite the emergence of new private labels in the space". Capital Ladder Advisory Group has been tracking K-cup pricing for quite some time now and based on our data, the claims by Keybanc have to be taken with the grain of salt. If one was just considering Keurig's advanced distribution of value packaging (48-60 count packages) alone, the natural distribution of this value oriented offering would have a negative organic pricing affect on K-cups. With this in mind as it has to be on the top of the list as we analyze K-cup and coffee pricing, it is hard to believe that pricing is holding steady, and yet we still haven't considered private labels entering the space on a YOY basis.
So let's not take into consideration private label participants as Keybanc suggests the firm has not done. Moreover, let's get right into what Capital Ladder Advisory Group has already discovered for themselves since the beginning of 2013 and dating as far back as 2010. Capital Ladder Advisory Group suggests that K-cup prices continue to decline for a variety of reasons, but does not go so far as to dispute the claims offered by GMCR regarding management's ability to leverage the total Keurig system in order to achieve profitability in varying degrees contingent upon seasonality. Capital Ladder Advisory Group, in coordination with Nielson research, suggests that K-cup unit prices have declined by .7% in the most recent period. The combined data from NPD Group, Capital Ladder Advisory Group and Nielson suggests that the Keybanc research note offered to the institutional investment community was void of substantive data and vague at best. Additionally, based on the combined data at hand there appears to be a price/unit decline of $.0112 cents per K-cup unit during the period. Noted below is the complete research notes released by Nielson on March 28, 2013:
According to data from Nielson, Starbucks' $-share in K-cups declined 70 bps in the four weeks ending March 16th. Starbuck's sequential $-share declined 70 bps to 15.8 percent. Meanwhile, Green Mountain Coffee Roasters added 190 bps to $-share. Total KCups (all brands ex-private label) $ sales as a % of the ground coffee category were 26.5% down from 26.9% last period, although these do not include private label kcups, suggesting that kcups continue to take $ share of ground. Similarly, total KCups units (ex kcups) comprised 16.9% of the ground coffee category, from 17.3% last period. Total KCup (all brands) $ sales growth remains strong, but decelerating increasing 35.7% this period, on a 36.4% increase in avg. eq. units and ~0.7% decrease in avg. eq. unit price.
According to the data released by Neilson, the research firm notes that Starbucks lost some market share during the period and GMCR gained some market share. The question then has to be, as we analyze the totality of the research provided, did GMCR acquire enough market share to offset K-cup price declines in the period.
Lastly, as it pertains to pricing in the coffee category; if you don't believe in the data presented maybe one should consider what some of the major participants in the coffee and coffee-flavored drinks category have been doing. Starbucks is lowering the list price of its bagged coffee to stay competitive as commodity costs ease across the industry. The coffee house chain says 12-ounce bags of its whole and ground coffee will be $8.99, down from $9.99. Starting next month, the company is also letting people earn points on its loyalty program from buying its bagged coffee. The odd thing about this latest move by Starbucks is that just one year ago it raised its prices on like items. The company must see something in the economy that has steered it toward this course of action. Is the company gearing up for further widening of income inequality? Is the middle class consumer being squeezed more than forecasted?
Kraft Foods (KRFT) has also committed to price cuts earlier this year. Kraft reduced its Maxwell House and Yuban roast and ground coffees by approximately 6 percent. It cut its Instant Maxwell House and soluble Sanka decaffeinated coffees by roughly 5 percent. The price cut is due to "sustained declines in the green coffee market," Kraft spokesman Russ Dyer said in an email, adding this only affects coffee sold in the United States. The company's move follows after Folgers-maker J.M. Smucker cut its U.S. list retail prices by approximately 6 percent, for the same reason. Folgers holds the biggest market share for fresh and instant coffee in the United States, having reached 11.8 percent in 2012, falling from 13.2 percent in 2011, according to Euromonitor International data. Maxwell House holds the fourth biggest market share, after Keurig and Starbucks, at 6.8 percent in 2012, down from 7.3 percent in 2011, the data showed. Still believe that prices are, "holding steady, as noted by Keybanc?
Q2 2013 remains a tough quarter for the analyst community when assessing the GMCR business. There are multiple moving parts which serve to underscore the changing economic climate in North America. As we assessed the data compiled by NCA, Nielson and Capital Ladder Advisory Group within this article, our next article will dig deeper into the overall retail sales channels in North America to see what the potential impact on GMCR could have been during its 2nd quarter of 2013. We are sure there were both positives and negatives during the quarter as the company aims to deliver strong results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.