Who doesn't love coffee? With the holiday season ongoing, consumers and investors alike prefer a warm cup of coffee to brighten up the season. Enjoying coffee is not the only thing that investors of Green Mountain Coffee Roasters (GMCR) should be happy about. This coffee maker just ended its 2013 fiscal year with flying colors. With a compound annual growth rate of more than 75% between 2010 and 2012, GMCR's strategy is leading it to grow in value and profits for shareholders.
As a leader in specialty coffee and coffee makers, GMCR is recognized for its award-winning coffees and innovative Keurig Single Cup brewing technology.
Financial Performance of the Last Quarter and Fiscal Year 2013
This year, GMCR reported a net increase in revenue of 16% and revenue peaked $4.4 billion. On a quarterly level, sales jumped by 22% nearing $1 billion. The portion pack segment led the company by accounting for 72% of its 2013's total annual sales and grew by 21% from 2012's level to nearly $3 billion.
The yearly 21% increase in portion pack revenue was a result of the 26% increase in unit volume and offset by a 1% decrease in net price realization and a 4% decrease due to portion pack product mix.
In the quarterly result, revenue showed improvements by 23% and increased to $778 million. The increase in revenue compared to last year's results (excluding management's estimated impact of the extra week of fiscal year 2012) was driven by a 29% increase in volume offset by a 2% decrease due to price effect and a 4% decrease attributed to portion pack product mix.
Similarly, the brewers and accessories segment volume increased by 11% and the company sold 10.6 million units. The decline in quarterly and annual other products and royalties of 10% came with pleasant news since it was a result of a continuing demand shift from traditional coffee package formats to the portion packs that GMCR offers.
Costs and margin
In 2013 the gross margin improved by 430 basis points to 37.2% from 32.9% in the previous year (excluding management's estimated impact of the extra week of fiscal year 2012). The following table showcases the changes in the gross margin from 2012 to 2013.
As you can see, coffee costs, are a primary component of total costs along with labour and overhead manufacturing costs. These costs all positively contributed towards the company's gross margin as did lower sales returns and warrant expenses that reflected GMCR's durable products. The quality offered by GMCR is one strong point that makes it more competitive among its peers and with its ongoing technological advances, precisely in brewing technology through Keurig, we can expect these expenses and sales return to lower further.
The GAAP and non-GAAP operating income improved to 17.6% and 18.8% in 2013 compared to 14.7% and 16% in 2012, respectively. The share repurchase program caused diluted weighted average shares outstanding for fiscal year 2013 to decrease 3.9% to 152.8 million from 159.1 million in the previous year. Finally, non-GAAP EPS increased 45% on a yearly level to $3.39!
In the future, GMCR expects net sales growth in the high single digits compared to 2013 with stronger revenue growth in the second half of the year as a number of unlicensed packs are provided to licensed partners.
Also, the company expects non-GAAP earnings per diluted share to increase between the range of $3.75 to $3.85 with free cash flow in the range of $200 million to $300 million after capital investments of $400 million to $450 million are completed to primarily fund new system introductions. With these increases, we can expect investors to incur greater profitability since the company might be able to provide higher dividends.
In 2014 the company has announced that it will launch its products in South Korea, the UK, Australia and Sweden. This expansion will be accompanied by the new Keurig brewer exclusively designed for these markets. Moreover, depending upon the degree of success in these four countries, the company may possibly expand into other markets such as Brazil, Mexico, Japan, Poland, Turkey, South Africa and Singapore.
GMCR is also working on building four new brewer systems: hot, cold, water and specialty. For each brewer system there will be new partners and multiple platforms aimed at catering to a wider group of customers. These new systems are expected to be developed and launched any time before 2016.
GMCR is enacting strategic plans that will increase expenditures in the short run but will ultimately lower risks and create value for shareholders in the long run.
GMCR also renewed its long-term partnership with Starbucks. Under the new five-year agreement, Starbucks (SBUX) will add more brands that will include Teavana Teas, Seattle's Best Coffee and Torrefazione Italia for its Keurig single-cup brewers. This will allow GMCR to generate more profits from Starbuck's large global distribution channel and its brand assets.
Vast Untapped Potential
GMCR has not yet entered the retail sector to avoid following the same pattern as its competitors. With growing demand and positive consumer sentiment, there is a lot of value creation left. GMCR plans to put its products into retail outlets by creating branded in-store GMCR experiences where consumers can use and try its brewing product as well as coffee.
The chart above shows how much presence Keurig has in the US market. It potentially has $10 billion worth of market share to realize. Given its strong awareness amongst consumers and a repeat rate (consumers buying the product again) higher than Starbuck's, there is no reason why GMCR's upcoming projects will fail to bring more return for shareholders.
Also, through its "Brew the Love" campaign, GMCR is connecting the dots by attracting consumers from social media, targeting metro locations such as New York, Miami and Los Angeles and giving free brew systems so people become aware of GMCR's presence. These steps could collectively give GMCR a customer base and increasingly dominant market place in the future.
Now let us examine to some technical aspects and fundamentals that will give us an idea of GMCR place in the industry.
GMCR has experienced revenue growth 4 times more than the industry in the last 3 years. Also, its net income has increased 8 times more than that of the industry. With operating and net margins along with ROA above its peers, GMCR is a good buy for not only those who love coffee but who also expect to earn money from it.
Even though ROE is less than it should be, note GMCR's debt levels.. With lower debts and free cash flows in a liquid position, the planned expansion in the next few years is likely to make investors happy. If that doesn't suffice, then they are likely to earn returns in terms of capital gains. In the last two years, the company's share value has increased by more than 50%!
With these prospects in mind, we leave it now for investors to decide whether or not this coffee maker would be a good bet in their portfolio. Excuse us now as we enjoy a cup of coffee.