Green Mountain Soars On Q4 Beat

| About: Keurig Green (GMCR)
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After the bell on Tuesday, Green Mountain Coffee Roasters (NASDAQ:GMCR) announced its widely anticipated fourth quarter and full year results. Green Mountain has been one of the biggest debate stocks in recent years, and Tuesday's results will fuel the next round of discussion. The company beat on both the top and bottom line, sending shares sharply higher in the after hours session.

Fourth Quarter Results:

For the fourth quarter, the company announced revenues of $946.74 million, handily beating analyst estimates for $902.23 million. The company also beat its own guidance of $889.9 million to $925.5 million. That represented approximately 32% growth over the prior year period. However, this quarter featured 14 weeks instead of 13, so if you subtract out the $90 million in extra revenues they reported in that week, growth was approximately 20.35%.

On the bottom line, the company reported non-GAAP earnings of $0.64, beating street estimates for $0.48, and the company's guidance for $0.45 to $0.50. However, that extra week did account for about 7 cents. Last year's fourth quarter earnings per share were $0.47.

The following table shows Green Mountain's 4th quarter margins over the past couple of years. These numbers are based on the GAAP results, and I'll use them to further analyze the quarter.

Green Mountain's cost of sales rose by 37.68% over last year's period, outpacing the 33% growth in revenues. Green Mountain provided the following table describing the change in gross margins, primarily related to the release of the Vue and associated ramp in manufacturing base.

While gross margins did decrease over last year's period, the company gets a pass due to the Vue release. Additionally, the gross margin numbers were still well above those from the two prior Q4 numbers.

The company was able to keep operating expenses in check, only reporting rises of 16.71% in selling and operating expenses, along with an 18.06% rise in general and administrative expenses. Overall, operating expenses rose by 17.19%, but that more than offset the fall in gross margins. Operating margins increased by 19 basis points over the prior year period.

The company also did well when it came to "other income" items. Other income shifted from a $285,000 expense to income of $230,000. However, the company did report a loss on financial instruments of $4.73 million, compared to a gain of $5.57 million in the prior year period. But that was more than offset by a $5.81 million currency gain, compared to a $7.56 million currency loss in last year's period. Also, interest expense was just $4.32 million compared to $5.1 million in the prior year period.

Pre-tax income rose sharply by 41.65%, faster than the rise in both operating income and revenues. However, the company's effective tax rate soared from 23.68% to 34.60% in the period. Green Mountain explained the rise as "attributable to the release of valuation allowances related to a $17.7 million capital loss carryforward and a $5.4 million net operating loss carryforward in the fourth quarter of fiscal year 2011 associated with the Company's sale of Filterfresh." This tax rate increase was not a surprise, as they had noted it in their guidance for the quarter. Net income for the period rose by 21.38%, which meant profit margins slipped by 93 basis points due to the tax issue.

GAAP earnings per share rose from $0.47 to $0.58. The rise in earnings per share was helped by a decrease in the diluted share count from 159.21 million to 158.09 million.

Under the company's buyback plan, the company bought back 3.1 million shares during the quarter. The company's cash flow statement shows $76.47 million spend on repurchases of common stock, meaning that the average price was about $24.67 per share.

Full Year Results:

When the company announced third quarter results in 2011, they guided to fiscal 2012 revenue growth of 60% to 65% and non-GAAP earnings per share of $2.55 to $2.65. However, after some disappointing results, the company lowered its forecast when it reported fiscal second quarter results. The new forecast called for 45% to 50% revenue growth, and non-GAAP earnings per share of $2.40 to $2.50. The company narrowed that forecast when it reported third quarter results. Revenue growth in a range of 43% to 45% was expected ($3.79 billion to $3.84 billion), along with non-GAAP earnings per share of $2.21 to $2.26, excluding about $0.20 due to the amortization of intangibles.

The company ended up beating its lowered estimates, reporting full year revenues of $3.859 billion and non-GAAP earnings per share of $2.40. The following table shows the full year margins for the company in comparison to previous years, again GAAP.

Many similar themes exist between the fourth quarter and full year results. Full year margins were also hurt by the Vue launch, partially offset by net prices realized thanks to a price increase. The following table shows the impact of various items on gross margins for the year.

Like the fourth quarter, a slower rise in operating expenses helped offset the decline in gross margins. The company also benefited from improvement in "other income" items, like lower interest expense and a gain on the sale of a subsidiary. But again, the tax rate increased a little, so the bottom line impact wasn't as great. Overall, net income for the period was up 80%, and profit margins increased nicely.

Balance Sheet Update:

The following table shows some key balance sheet items and metrics. I've compared the end of this quarter to the recently reported Q3 as well as the previous two fiscal year ends. Dollar values in thousands.

The company's cash balance decreased a lot in the period, and I guess that is expected given the buyback and Vue launch. The company's inventory balance rose another $100 million in the quarter, primarily due to a $105 million increase in brewers and accessories. Working capital and the current ratio increased nicely. However, of the $164 million increase in current assets, there was the $101 million in inventory and another nearly $98 million increase in receivables.

Some of the longer-term numbers did get slightly worse. Long-term debt and capital lease liabilities increased by $121 million, which fueled a 20.7% quarterly increase in total liabilities, compared to just a 8.35% rise in total assets. The company's deferred income taxes also rose by over $58 million.

Overall, the company's balance sheet was mixed in the quarter. Because this company ramps things up for a busy holiday season, some numbers are inflated for Q4 results. The year over year numbers showed improvement, so we'll have to see how things turn out when they report fiscal Q1. It is important to note that the company expects decent cash flow in the fiscal year only because they've reduced the amount of capital expenditures they are making.

Guidance Update:

The company provided the following guidance for fiscal 2013 when third quarter results were released:

  • Total net sales growth in the range of 15% to 20% over fiscal 2012.
  • Fiscal year 2013 non-GAAP earnings per diluted share in a range of $2.55 to $2.65 per diluted share, excluding approximately $0.18 per share due to the amortization of identifiable intangibles related to the Company's acquisitions; any acquisition-related transaction expenses; legal and accounting expenses related to the SEC inquiry and the Company's pending litigation; and, any impact from anticipated Company share repurchases.
  • Capital expenditures in the range of $380 million to $430 million.
  • Free cash flow in the range of $100 million to $150 million.

The company reiterated its revenue forecast for the full year, which can be seen as both a positive and a negative, for now. On the positive side, the company's forecast is above the 15% revenue growth currently expected by analysts. However, the fact that they didn't raise the forecast after such a great Q4 leads to some questions. You might have expected them to see a better year going forward if this past quarter was so good.

On an earnings per share front, the company guided to non-GAAP earnings of $2.64 to $2.74, excluding $0.23 due to intangibles and the like (mentioned above). This forecast includes any shares purchased up until November 27th, but does not include any impact from future share purchases. Free cash flow and capital expenditure guidance were not changed at this time.

For the fiscal first quarter, the company guided to revenue growth in a range of 14% to 18%. That is higher than the current street expectation for 11.7%. Non-GAAP earnings per share are expected to be $0.62 to $0.67, excluding $0.06 for the same items mentioned above and a similar stance on the impact of the buyback (shares before November 27th). Analysts were expecting $0.59.

Final Thoughts:

It is interesting to note that while Green Mountain beat what analysts were expecting on Tuesday, they still missed what analysts were expecting back when they reported Q3. Analysts back then were looking for $952 million in revenues, so they still missed that by about $6 million. Analysts were expecting $0.62 in earnings, so they beat by two cents there. However, the buyback was a total shock, so if analysts had factored that in, I think the company would have basically met expectations. Additionally, full year estimates at the Q3 report were for $4.72 billion in revenue and the current guidance implies $4.44 billion to $4.63 billion. Also, analysts were looking for $2.97 in earnings. They may get to that figure thanks to all of the buybacks, but their current guidance was for just $2.64 to $2.74.

I had mentioned recently that Green Mountain needed to answer its critics in order to rally, and they certainly did that this time around. Results were certainly good for Q4, and guidance was decent. However, one must remember that this company reported a huge Q1 last year, and then fell flat on its face when it reported Q2. The company will need to prove itself again next quarter. Also, earnings per share guidance seemed really good, but a lot of that may end up being due to the buyback. That's the buyback that is taking place instead of capital expenditures. In the short term, it might work to boost earnings, but it still means the company doesn't have much of a growth strategy. Also, net income isn't growing as fast as earnings per share, meaning the company is using the buyback to hide a lack of growth.

In Tuesday's after hours session, shares rallied about 24% to $36. That move may seem justified based on these results, but you have to remember that this stock hit a low around $15.25 after last quarter's earnings report. So you are now talking about a 136% rally. Also, the stock is up 100% from where it was prior to reporting Q3, and as I detailed above, they basically "missed" those revenue expectations. Bulls will tell you that the $15 low was unjustified, but remember, we're talking about a company that is guiding to 17.5% revenue growth just two years after 95% revenue growth. Given the large rally, it will be interesting to see where Green Mountain finishes this week at. This is because the company's guidance is still below where analysts expected it to be last quarter, and the stock has doubled from that point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.