Green Mountain Gets Roasted Again

| About: Keurig Green (GMCR)

After the bell on Wednesday, coffee company Green Mountain Coffee Roasters (NASDAQ:GMCR) announced its fiscal second quarter earnings. To sum it up, it was terrible. In fact, terrible may actually be a positive spin on the report. The company widely missed on both the top and bottom line, and forward looking guidance was well below expectations.

This is the latest failure for the company, and significant questions will arise about the company's future, including its quickly slowing growth potential. Look for this to be considered a huge short candidate for the indefinite future.

Second Quarter Results:

Green Mountain announced net sales of $885.1 million, up 37% from the year ago period. However, the street was looking for 50% growth, at more than $971 million. This is the second quarter of the past three in which the company has widely missed revenue estimates. Here is a breakdown of the sales numbers, taken from the earnings report.

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Single serve packs were up, but I think people wanted more. It did not help that brewer sales were up just 21%, and that "other products and royalties" were down 25% year over year. Had that category been up 25%, this would have been a much different earnings report. Non-GAAP earnings per share of $0.64 were in line with estimates. GAAP earnings per share were $0.58.

Now, we have heard recently from Starbucks (NASDAQ:SBUX) and Peet's (NASDAQ:PEET) that coffee prices have been high, however, that wasn't the main problem with Green Mountain. The huge revenue miss, primarily due to weaker than expected K-cup demand and increase in coffee prices pressured gross margins, which was felt through the entire income statement. The company was able to control other costs, however. Here's how second quarter margins stack up against recent years.

Margins FY 2009 FY 2010 FY 2011 FY 2012
Gross 32.06% 33.50% 37.50% 35.37%
Operating 11.71% 12.47% 18.47% 16.90%
Profit 6.71% 7.47% 10.09% 10.51%
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Net profit margins were up over last year's period, but the gross and operating margins took a dive. When you factor in the nearly $100 million miss in revenues, this was a terrible quarter.

Guidance/Conference Call - Here's where it gets worse:

If the second quarter numbers weren't bad enough for you, here is what the company gave for guidance.

  • Net sales in the range of $861 million to $897 million or net sales growth of 20% to 25%, from $717.2 million in third quarter of fiscal year 2011. Current expectations called for $1.05 billion in quarterly revenues.
  • Fully diluted non-GAAP earnings per share in the range of $0.48 to $0.53. Current expectations were for $0.72.

Thanks to the large miss in the second quarter, as well as the below estimate guidance for the following quarter, Green Mountain was also forced to give weaker than expected full year guidance. Remember, their fiscal year ends in September.

  • Total net sales in the range of $3.8 billion to $4.0 billion, or net growth of 45% to 50%, from $2.7 billion in fiscal year 2011. Current estimates call for $4.27 billion.
  • Fiscal year 2012 non-GAAP earnings per diluted share in a range of $2.40 to $2.50 per diluted share. Current estimates called for $2.67.

On the conference call, executives seemed a bit down. They seemed to not understand why the quarter was so bad, and why they had to take down their forecasts. They did discuss the impact of weather (I cover that more later), something that Starbucks last week said that Starbucks does not use as an excuse.

Green Mountain now only expects moderate growth going forward, as opposed to the very high, almost explosive growth we saw in the past. Hmm. Last quarter, they said they were revising the models used to give forward guidance. Maybe we should have seen this coming. Apparently, Green Mountain didn't.

Balance Sheet:

The only bright spot may be that some areas of the balance sheet improved, and here are some key numbers over a few recent quarters.

Financials 12/25/10 9/24/11 12/31/11 3/24/12
Cash, Equivalents $32,921 $12,989 $84,111 $146,003
Inventory $269,132 $672,248 $606,679 $602,121
Current Assets $644,800 $1,131,527 $1,183,509 $1,152,722
Total Assets $2,539,253 $3,197,887 $3,218,257 $3,309,207
Current Liabilities $297,067 $471,374 $491,692 $489,066
Total Liabilities $1,575,886 $1,285,672 $1,188,075 $1,161,031
Current Ratio 2.17 2.40 2.41 2.36
Working Capital $347,733 $660,153 $691,817 $663,656
Debt Ratio 62.06% 40.20% 36.92% 35.08%
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The current ratio number and working capital amount declined slightly, but on the flip side, the debt (liabilities to assets) ratio did improve a little. Also, inventories were up 100.2% over the prior year period. However, that percentage increase was less than the previous two quarters, which saw 156.1% growth (Q4) and 125.4% growth (Q2). Unfortunately, it doesn't really how much inventory you have, if you can't sell any of it.

Conclusion/Reaction to Stock Price Movement:

The stock resumed trading at 4:20 PM Wednesday afternoon, and immediately shares plunged. They continued lower, ending the after hours session down more than 40%, failing to hold the $30 level.

What to do here? Well, this stock immediately has become a short candidate again, and I expect that it probably will go lower for a short period of time. This wasn't just a one quarter issue, we saw this two quarters ago as well.

Green Mountain's future has been in doubt recently over their expiring patents which have forced the company to develop new brewers in an effort to remain a leader in the single serve market. Starbucks announced its single serve espresso machine a number of weeks back, and the Green Mountain / Starbucks partnership has been in question ever since. Starbucks is big enough that they could easily dominate this industry if they wanted to.

Green Mountain's growth came to a screeching halt, and it is going to take a while for shares to recover. Remember, this company traded for over $115 last year, now we are struggling to hold $30. Could this be a warm winter issue like Deckers (NASDAQ:DECK)? It is possible. Deckers blamed a warm winter for their terrible numbers, but how equivalent are coffee and UGGs? With Green Mountain, it might be more that the company is facing more competition, and not just a warm winter. People will always drink coffee, even when the weather is warm.

Green Mountain is now a great short candidate again. However, if shares fall far enough, perhaps to the $20 to $25 range, I might pick some up and go long the name, trying to take advantage of a quick pop. However, I will not be entering a long position for an extended period of time, and may in fact enter a short position in the name.

Disclosure: Might enter short position over next 72 hours, unless name falls into $20 to $25 range, where I would consider a long position.