Farmer Brothers (FARM) just reported its fourth quarter results, but again, they were underwhelming at best, as the coffee producer posted a 77 cent loss versus a $1.47 of red ink the prior year. Sales were up just 1.4% from $119 million to $121 million (heck inflation is more than that) as the company raised prices, but lost customers in the process.
The most outrageous metric sticking out? Despite the fact the company's gross profit margin ballooned 70% from 22% to 37.5% (a whopping 1550 basis point improvement) they were still unable to produce a profit. The only answer to FARM's poor results is that its cost structure is still too high. Although its selling expenses fell 100 basis points to 34% of sales, its G&A costs went the wrong way, increasing 36 basis points from 7.8% to 8.16%. The company still needs to reduce its selling expenses by an another 200 basis points to reach the promise land, but I suspect persistent high fuel costs (they have a 500 vehicle fleet) will make further reductions challenging.
Management's cavalier attitude: management stated that they are pleased with their progress in fiscal 2012 and are optimistic about additional improvement in fiscal 2013. I 'm glad they are happy, because the shareholders sure aren't, as the shares have fallen 75% from their peak in March of 2004. Management needs to make a more concerted effort to communicate its turnaround plan to the Street. It must simplify its plan, prioritize it and implement it with the highest sense of urgency.
How about actually hosting earnings conference calls, being more assessable to shareholders and presenting at investment conferences? What about thinking outside the box and making some radical moves? After all, doing the same thing over and over again and expecting different results, is the definition of you know what. How about getting into the K-cup or energy drink business? Green Mountain Coffee Roasters (GMCR) just announced it had entered into the wellness drink business and saw its shares literally double in just the last six weeks.
First quarter earnings: Fiscal 2013 first quarter results are slated to be released in about eight weeks, and should improve due to lower coffee bean prices. One revealing hint that the most recent 10K exposed was a pay down of debt. This action bodes well for a better first quarter, because as of August 30th, the company's line of credit balance was reduced an additional 17% from $29 million to $24 million. The ability to pay down debt typically comes from strong cash flow, so the implication of a decent quarter materializes.
Roth Capital expects FARM to celebrate its first profitable quarter in a very long time, by earning 11 cents on revenues of $125 million. I will believe when I see it. Until then, I will remain skeptical, but realize that good things do happen to those who wait.
Disclosure: I am long FARM.