Green Mountain Coffee Roasters, Inc. (GMCR) is due to report Q2 fiscal 2013 earnings after the close of trading on Wednesday May 8, 2013. This is a highly anticipated report since the company beat analysts' estimates handily in the first quarter of 2013. After a strong finish in 2012 and some early follow through performance in 2013, several analysts covering GMCR have increased their respective price targets on GMCR and are currently expecting a strong Q2 performance. Let's take a look at current estimates and historical results as provided by Capital IQ in the chart below:
Here is a look at just how the company performed in Q2 2012 with analysts expecting the company to grow the top line at roughly 16% YOY:
- Total Net Sales: $885 million
- Single Serve net sales: $655 million
- Keurig brewers & accessories net sales: $140.2 million
- Non-GAAP Net Income: $101.7 million
- Non-GAAP EPS: $64 million
Since GMCR's Q2 2012, much has taken place inside the company and in the marketplace. The coffee flavored drinks category has grown substantially while GMCR has seen its former CEO Larry Blanford replaced with the company's new CEO Brian Kelley. Additionally, the stock has climbed some 16% since its Q2 2012 reporting date. While the mighty GMCR tree had fallen hard on that day, it has risen slowly and steadily over the last 365 days.
As we move forward with our quarterly review, we have to take into account GMCR's most recently reported results and guidance for Q2 which showed the company raising its expectations for the full year. Green Mountain increased non-GAAP EPS estimate to a range of $2.72 to $2.82 per share. Don't be fooled by the raised EPS guidance as it was noted by management that this might very well be a factor of lowering Capex. GMCR lowered estimated capex to a range of $350 million to $400 million from a prior range of $380 million to $430 million. Having already completed half of Q2 when this guidance was offered to investors, it is hard to believe that any significant divergence from this view would have occurred during the quarter. This raising of earnings and lowering of capex spend may certify the leverage the company has currently with regards to operations. While new guidance seems to be a positive on the surface, GMCR has a history of repeatedly changing guidance during the year. In this case, however, Capital Ladder Advisory Group is of the opinion that management has developed the appropriate equation to leverage multiple aspects of its operations to support the current guidance. One such measure was employed already during the quarter as the company let go of workers 100+ workers.
On March 14th this year, Green Mountain Coffee Roasters laid off 74 full-time production and support staff at its Castroville, Calif., and Toronto, Ontario, facilities. The company also laid off 36 seasonal employees at production facilities in Toronto and Montreal. The company says the layoffs, which represent less than 2 percent of GMCR's workforce, are intended to "enhance manufacturing and logistics efficiency" among its nine North American K-Cup pack and Vue pack production locations. In a company announcement to investors, GMCR says it expects a one-time pre-tax charge of $600,000 to $650,000 related to the layoffs. Although the company did not say whether all full-time employees would receive cash, that works out to $8,108 to $8,783 per full-time employee being dismissed.
In terms of supply and demand, investors have to consider if this announcement, which came roughly one month after the company raised full year earnings estimates, is a reading into demand for Keurig products or if it is simply a measure of the company delivering on proposed improvements through improved efficiencies. In an ideal consumer environment, producers would likely participate in the expansion of its workforce to meet the demand for its products.
On a positive note, Green Mountain's quality of earnings should have improved during Q2 2013. The company is currently cycling through lower green coffee costs and seeing modeled improvement in its warranty claims. For the remainder of the year, CEO Brian Kelley has stated that he expects to see continued year-over-year gross margin improvement due to lower green coffee costs and ongoing brewer quality improvements. In Starbucks (SBUX) most recently reported quarterly results, the company also benefitted from margin expansion: Starbucks: Channel Development net revenues were $343.5 million in Q2 FY13, an increase of 7% over Q2 FY12, primarily driven by sales of Starbucks- and Tazo-branded K-Cup packs. Operating margin expanded 180 basis points to 15.3% this quarter, compared to 13.5% in Q2 FY12. The margin increase was primarily driven by sales leverage and lower coffee costs.
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.
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. 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
Last, but certainly not least, let's take a look at how GMCR sales for its single serve K-cup packs faired during the most recently reported quarter as it outlines pricing for single serve coffee packs: The increase in single serve pack net sales was driven by a 26 percentage point increase in sales volume offset by a 4 percentage point decrease due to single serve pack product mix and a 1 percentage point decrease due to the net price realization of single serve packs. There are two things to focus on in this outline taken directly from the GMCR Q2 10-k filing and we hope that investors understand the terminology offered by GMR's management team when they use the terms product mix.
As coffee and tea consumption continues to grow in North America, so will the number of participants in the product category. Even Bunn, traditionally a maker of commercial beverage equipment, launched a home version of its single-serve coffee machine late last year. The machine, called MyCafe, will work with Keurig's K-Cups, even though it is not licensed to do so. Tassimo launched its latest machine the T47 for $139.99. We would expect Starbucks to launch an updated version of its Versimo sometime this year as the original version was not received favorably in the marketplace.
In order to fend off competition and continue to grow market share, GMCR has taken to an approach which makes its brand more recognizable. In Q4 of 2012, the company began displaying its products and brand in commercial advertisements. This method of brand promotion has continued in the early part of 2013.
Additionally, the company continues to add new and innovative products to its existing product line-up. During Q2, the company launched its latest version of the Vue brewer which supports a lower price point than the original Vue700 brewer. The new Vue500 is priced more reasonably at $169.99 for most participating retailers. The biggest difference between the two brewers is the size of reservoir which amounts to the machine size differential. The Vue500 launch effectively eclipses the launch of last year's V700 launch by Capital Ladder's channel check indications. Last year, the Vue700 was launched exclusively at Bed Bath & Beyond (BBBY). Having said that, all that will matter in terms of sales is whether or not retailers delayed or even cancelled orders for the V700 in favor of waiting for the new Vue500 to become available. Capital Ladder Advisory Group's full report details whether or not participating retailers followed through with orders for the existing Vue brewer or delayed/cancelled orders in favor of the new Vue500 brewing system.
In the context of the current economic climate, investors have to consider end user demand when investing in consumer related stocks. Most economic data coming out of the U.S. has been unfavorable as of late. A number of Keurig participating retailers are struggling to achieve consumption rates they have seen in the past. If we consider the latest retail sales data and apply it to GMCR s retailer base, we have to assume moderation of growth along the lines that we have witnessed for the previous four quarters. Two of Green Mountain's largest retailers have already warned on Q1 2013 results; one of these two retailers, Target Corp. (TGT) has cut full year guidance citing consumer weakness.
Since GMCR issued its latest guidance with half of Q2 already completed, there is likely not much to worry concerning the May 8th earnings release. Guidance, however, if offered any differently will be widely anticipated as retailers are feeling moderation in consumer spending.
Lastly, it is important for retail investors to paint the correct picture surrounding Starbucks and the Verismo product line. In our full scale GMCR Q2 2013 report, Capital Ladder offers a look at just how many Verismo brewers are selling on a monthly and bi-monthly basis. If you have any additional questions, please contact us further at firstname.lastname@example.org. Good luck investors!