Green Mountain (GMCR) reported excellent fiscal fourth-quarter results. Fourth-quarter revenue advanced 22% from the same period a year ago (52-to-52 weeks) thanks to robust brewer sales and portion pack revenue growth (up 11% and 21%, respectively, as adjusted). The 21% increase in portion packs revenue was driven by a 26% increase in unit volume offset by pricing and mix. Portfolio packs revenue accounted for 74.2% of total net sales in the fiscal fourth quarter.
The company's gross margin expanded 240 basis points during the quarter, to 36%, thanks primarily to favorable green coffee costs and lower labor and overhead manufacturing costs. Non-GAAP operating income advanced to 18.2% of sales in the period from 16.4% in last year's quarter. We like that Green Mountain continues to take positive strides to improve underlying profit measures relative to more-established peers (fourth-quarter and full-year 2013 measures improved materially from fiscal 2012 levels shown below).
Image Source: Green Mountain
Fourth-quarter non-GAAP earnings per share came in at $0.89 per share (52-to-52 weeks), up an impressive 56% from last year's quarter. The company noted that free cash flow generation of $603 million for the fiscal year was nearly 8 times that of last year's mark. Inventory reductions (+$180.5 million), stretching payables (+$116.4 million), and lower capital spending (+$168.3 million) helped the year-over-year free cash flow performance significantly. Cash and cash equivalents totaled $261 million, while current and long-term debt totaled $173 million at the end of the period.
Looking ahead, Green Mountain continues to expect double-digit annual revenue and earnings expansion in the mid-teens over the long-term. Though we think this is an admirable goal, it's not a practical one, in our view. We expect top-line growth to slow to the high-single-digits by the end of our 5-year explicit forecast horizon.
For fiscal 2014, the firm already expects net sales growth to be in the high-single-digits with some variability quarter-to-quarter as it continues to transition to new products. Green Mountain is guiding to non-GAAP earnings per diluted share of $3.75-$3.85 for fiscal 2014 and free cash flow in the range of $200-$300 million on capital investment of $400-$500 million, the latter up from $233 million in the prior fiscal year. Though we expect fiscal 2014 to be robust, the firm will be annualizing some hefty brewer and portion pack sales comparisons in fiscal 2013, so we won't rule out the possibility of a quarterly miss next year.
Green Mountain has been one of the best growth stories of this century (as shown in image below), but the firm must continue to innovate or face waning growth at best. We like the company's razor/razor-blade model (the selling of the brewer-the razor-and the selling of the K-Cups-the blades), but the firm is not entirely insulated from competition, now and in the future. We're not talking about jet engine parts that have to withstand intense conditions at 40,000 feet, but Green Mountain makes coffee machines and sells cups filled with roasted/ground coffee/tea/cocoa. The firm has already experienced patent expirations in September 2012 (1), and we fully expect competition to pressure long-term growth and profits over the long haul. Green Mountain may continue to execute nicely next year or even for a few years after that, but eventually the competitive environment (2) will catch up with the firm. Competition from unlicensed brands and unlicensed private label manufacturers will continue to proliferate as long as Green Mountain demonstrates a market for such a product. We're not interested in adding the company to either of our actively-managed portfolios. The stock may gain on near-term optimism, but the end game may not be great for Green Mountain investors.
(1) The firm owns patents that cover significant aspects of its products. In the United States, certain patents associated with our current generation K-Cup packs presently used in Keurig K-Cup brewers expired in September 2012. The firm has additional pending patent applications associated with certain elements of current K-Cup pack technology which, if ultimately issued as patents, would extend coverage over all or some portion of K-Cup packs, and have expiration dates extending to 2023. Certain elements of the current generation of Vue packs are covered by patents which expire in 2021 and by others that are still pending (Source: 10-K).
(2)Bunn-O-Matic Corporation, Mars, Inc. (through its FLAVIA unit), Conair, Inc., Hamilton Beach / Proctor-Silex, Inc., Jarden Corporation, Nestle S.A. (including the Nescafe Dolce-Gusto beverage system), Phillips Electronics NV (including the SENSEO brewing system, in cooperation with Sara Lee Corporation), Robert Bosch GmbH (including the TASSIMO beverage system, in cooperation with Kraft Foods, Inc.), Stanley Black & Decker, Inc., Starbucks Corporation (including its Verismo brewing system), and Whirlpool Corporation (Source: 10-K).
Image Source: Green Mountain