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After the bell on Wednesday, shares of coffee maker Green Mountain Coffee Roasters (NASDAQ:GMCR) reported an absolute great quarter. The company had great success in the holiday season, sending shares higher in the after market. The company reaffirmed full year guidance, which is currently above estimates. The balance sheet looked good. The only bad news was guidance for the next quarter was a little light, but they are probably being conservative. They crushed estimates this quarter.

First Quarter Results:

When reporting last quarter, Green Mountain gave the following guidance for its fiscal first quarter:

  • Net Sales growth of 85% to 90%.
  • non-GAAP earnings per share of $0.35 to $0.40.

Analysts were expecting 84.6% revenue growth to $1.06 billion, and earnings per share doubling from $0.18 to $0.36.

They did much better. Net revenues came in above $1.158 billion, up 102% over the prior year period. Non-GAAP earnings per share came in at 60 cents, well above expectations. These results were much better than last quarter's results, where they missed revenues by $50 million and earnings per share by a penny.

Here are the key income numbers, on a GAAP basis.

1st Quarter FY 2010 FY 2011 FY 2012
Net Sales $345,152 $575,027 $1,158,216
Cost of Sales $249,575 $430,613 $821,612
Gross Margin $95,577 $144,414 $336,604
Operating Income $19,030 $23,079 $145,838
Net Income $10,060 $2,229 $104,414
EPS $0.07 $0.02 $0.66

K-Cup pack sales were up 115% to $715.7 million. Brewers and accessory sales were up 76% to $330.4 million. Other sales and royalties were $112.1 million, up 111%.

They deserve great credit for this quarter, and I'll give it to them. I, like many others, have been down on the name recently, especially after last quarter's huge miss. I said that the company could be set up for disappointment with such high expectations, and that they needed to prove last quarter's numbers were a one quarter issue. They did, and good for them.

Green Mountain did a great job improving its year over year margins, which helped contribute to its excellent results.

Margins FY 2010 FY 2011 FY 2012
Gross 27.69% 25.11% 29.06%
Operating 5.51% 4.01% 12.59%
Profit 2.91% 0.39% 9.02%

Green Mountain did a nice job on lowering its product costs, which helped improve its gross margins. But the main improvement was lower on the income statement. Selling and operating expenses were only up 80% (remember revenues more than doubled), as well as general and administrative expenses only up 17.5%. Those two numbers helped operating margins to more than triple year over year. The company also had a much lower effective tax rate, which helped its profit margins stay fairly close to its operating margins, something that last year's period was unable to do.

Balance Sheet:

Below is some key balance sheet data for the company:

Financials 12/25/2010 9/24/2011 12/31/2011
Cash, Equivalents $32,921 $12,989 $84,111
Inventory $269,132 $672,248 $606,679
Current Assets $644,800 $1,131,527 $1,183,509
Total Assets $2,539,253 $3,197,887 $3,218,257
Current Liabilities $297,067 $471,374 $491,692
Total Liabilities $1,575,886 $1,285,672 $1,188,075
Current Ratio 2.17 2.40 2.41
Working Capital $347,733 $660,153 $691,817
Debt Ratio 62.06% 40.20% 36.92%

Green Mountain improved the three main financial ratios I look at. The current ratio only marginally improved, but working capital increased by nearly $32 million, and the debt ratio (liabilities to assets) increased nicely as well. One thing everyone always looks at is the inventories. While they did increase more than 125% year over year, that was less than the 156% year over year increase we saw in the past quarter.

Guidance:

The company re-affirmed its full year guidance:

  • Net sales up 60% to 65%. Current analyst expectations are for 60% growth to $4.24 billion.
  • non-GAAP earnings per share of $2.55 to $2.65. Current analyst expectations are for $2.56.
  • Capital expenditures of $630 to $700 million.

The only weakness in this quarters report was the guidance for their fiscal second quarter:

  • Sales growth of 45% to 50%. Current analyst expectations are for 58.8% to $1.03 billion.
  • non-GAAP earnings per share of $0.60 to $0.65. Current analyst expectations are for $0.73.

Guidance for the next quarter was a little weak, but it has been unseasonably warm throughout areas of the country, like the 60-65 degree weather today in the New York City area.

I don't want to make too much of the quarterly guidance for two reasons. One, we just saw that they have the capacity to blow out earnings expectations. If and when analysts take down their expectations, Green Mountain could beat tremendously again. Secondly, they noted that they are currently in the process of changing their model assumptions for guidance. This guidance could be conservative until they fully revise their models.

Competitive Landscape / Looking Forward:

Green Mountain has a partnership with coffee shop giant Starbucks (NASDAQ:SBUX), which was not mentioned in the quarterly report. Green Mountain's K-cups, which are very convenient, will continue to battle those who flock to Starbucks and other rival Dunkin Donuts (NASDAQ:DNKN) daily. Green Mountain has gotten a ton of brewers into homes, so now it just needs to sell those K-cups. The warm weather right now is not helping, but there isn't much they can do about that.

A second issue has to deal with some K-cup patents expiring in 2012. Green Mountain has shrugged off this issue, saying that it will have little to no impact. They are working on either extending the patents or have a slight adjustment to a K-cup that will be able to get a new patent. However, we expect some competition will arise. Green Mountain did say on the conference call that they will keep working on the patent issue. They also announced that they would be adding more brewers in the second fiscal quarter (calendar first quarter).

Green Mountain has been criticized for its poor cash flow and balance sheet, although as I've shown above, they had a nice quarter. Operating cash flow was much better than the prior year period, and the company has more financial flexibility than in prior quarters.

Conclusion / Stock Recommendation:

Green Mountain shares traded up to $65 in extended hours. They are likely to see a nice pop Thursday on the blowout quarter. I think that investors will set aside the weak Q2 guidance for now.

I bought some shares after the report but probably will sell them on Thursday. This name has been a heavily shorted one, so it will be interesting to see how many of the shorts cover their positions. I think that the euphoria that surrounded this name in the past could come back, and we could see a Netflix (NASDAQ:NFLX) like pop. For now, I think shares could trade all the way up to $75, but investors will need to re-evaluate after the next week or so. While the P/E for 2012 will be jumping back into the high 20s, it is still well below the 40s or so it was trading at last year. However, this name was down in the $30s recently, which gave it a very low valuation. That valuation will most likely increase on Thursday, but don't get caught buying too high.

Disclosure: I am long GMCR.

Additional disclosure: Author long GMCR at time of writing, but looking to sell position, most likely on Thursday. Will update position status in article comments.

Source: Hot Coffee: Green Mountain's 1st Quarter Big Beat