Green Mountain Coffee Roasters Q1 2013 Earning Preview

| About: Keurig Green (GMCR)
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On February 6, 2013, Green Mountain Coffee Roaster (NASDAQ:GMCR) will announce its Q1 2013 earnings results and it will be the first GMCR post earnings release conference call headed by the new CEO Brian Kelly. Mr. Kelly formerly held the position of President of North America Business Integration for Coca-Cola (NYSE:KO) and was to be the President of Coca-Cola as of January 1, 2013, but as we see this succession plan for Coca-Cola did not come to fruition. Now, let's look at the guidance Mr. Blanford left for the company's Q1 report.


The following bullet points relate to the guidance offered by the company during the Q4 2012 earnings release.

  • For the first fiscal quarter, GMCR anticipates total net sales growth in the range of 14% to 18%. We anticipate first-quarter 2013 non-GAAP earnings per diluted share in the range of $0.62 to $0.67, excluding the non-GAAP items as noted in today's press release.
  • For fiscal 2013, GMCR anticipates total net sales growth in the range of 15% to 20% over the prior year. Fiscal year 2013 non-GAAP earnings per diluted share in a range of $2.64 to $2.74, excluding the non-GAAP items as noted in today's press release
  • GMCR expects capital expenditures in the range of 380 million to 430 million, which based on our estimates is approximately 9% of our forecast for 2013 sales, down from 10% of sales in 2012 and 11% of sales in 2011.

Shares of GMCR are looking to stabilize and trend higher during 2013 after a tumultuous year, which saw shares rise and fall on numerous occasions based on the competitive landscape in the single-serve coffee industry and the lowering of guidance on two separate occasions. With all of that in the rear-view window, now GMCR can look forward to building upon positive momentum coming out of fiscal 2012. One major accomplishment for the company in 2012, in the eyes of the investment community, was that the company ended the year with 76.7 million in free cash flow. Additionally, the company expects to continue to strategically invest in the business as demand warrants and has forecast free cash flow in a range of $100 million to $150 million for fiscal 2013.

In Q3 of 2012, the company instituted a strong $500 million share repurchase plan. As of the most recent Q4 quarterly filing, GMCR has used $175 million of the Board authorized $500 million toward the repurchase of these shares at an average price of $23.72 per share.

GMCR is a highly scrutinized company and over the last several years investors became accustomed to the rapid growth of the company. However, GMCR has now moved into a more mature, yet still growing category. This stage of the business cycle is characterized by a moderating growth metric or a slowing of growth if you will. Fran Rathke, CFO of Green Mountain Coffee, said it based in the following statement during the Q4 2012 earnings call with investors and analysts: "We have identified a number of factors that brings us to an annual mid teens earnings per share growth rate over the longer term." Within the expectations for earnings growth and guidance are the assumed user base growth calculations by the company's management, which by the end of fiscal 2013, believes the installed Keurig Brewer base in the U.S. will be approximately 17 million, while approaching 25 million brewers by the end of fiscal 2014.

The installed user base should continue to grow over the coming quarters and years as the single-serve coffee category continues to grow. From an anecdotal perspective, shelf space at grocery retailers continues to expand for the category, indicating further consumer adoption of the category. During FY12, Wal-Mart (NYSE:WMT), Bed Bath and Beyond (NASDAQ:BBBY), Kohl's (NYSE:KSS) and Target (NYSE:TGT) expanded the shelf space for the product category. Within the single-serve product category, Keurig branded brewers continue to demonstrate strong unit share growth, increasing share of the category to 15.2% of total units, up from 11.6% in the same period last year.


Margin contraction has been a focal point for investors as 2012 marked a year of steady declines in gross margins. With the marketplace now flushed with a plethora of single serve competitors, GMCR will continue its need to invest back into the business through R&D and brand spend. The company has differentiated itself as the leader in the product category, but strong brand competition has recently forced the company to identify its own strengths and weaknesses. With this heightened state of awareness, in October the company began its "Changing the Way America Brews" mail-in rebate event, which was aimed at jump starting the holiday season sales. While bears may look upon this rebate program negatively, or as the company pulling forward demand, which would otherwise offset sales down the road, the company stated that this planned event is incorporated in the Q1 guidance.

In keeping within the theme of margins, investors had been expecting to see some lower cost benefits from green coffee costs at some point, but this notion has yet to be realized by GMCR. The company says it has been buying throughout this downward trend on coffee cost and the current inventory in use will be consumed at lower rates and throughout 2013. GMCR on the last earnings call detailed for investors that it expects to see a pretty significant shift or benefit from the coffee cost during Q3 and Q4 of 2013.

Whether it is the innovation of new products and bringing those products to market in a timely fashion, competitive sentiment by the investor community and the way the company addresses these issues, margins continue to bare the brunt of the management team's shortcomings with regards to executing the business. For the razor/razor blade business model to prove effective and return equity to shareholders in the long run, execution is crucial. One analyst recently shed light on this topic during the Q4 earnings conference call. Akshay Jagdale of Keybanc Capital Markets asked Larry Blanford to better define why gross margins continue to come under pressure. Blanford offered a retort that initially identified the company's growing brewer sales as a drag on gross margins due to the user base expanding at a high rate. However, Jagdale added that if one strips out brewer sales, there still seems to be adequate gross margin pressure realized YOY, 200 basis points worth in 2012 alone (paraphrasing of course). Blanford's answer to the analyst asks investors and analysts alike to accept the many moving parts of the company and the company's objectives related to GMCR's long-term profit goals.

Currently, gross margins are being pressured by green coffee costs, manufacturing and factory utilization initiatives, costs related to continued efforts in R&D, brand spend, and forecasting methodology.

Based on the recent exchange between Akshay Jagdale and Larry Blanford regarding gross margins, the razor/razor blade business model employed by GMCR is taking longer to appreciate than expected. However, with that said, management will need to identify and leverage opportunities within the business to grow margins going forward. When looking at the single-serve landscape, we would project a shift away from manufacturing and forecasting spend toward brand spend by GMCR in the future. We draw this conclusion due to the company's recent brand spend during FY Q4 in which the company launched a television ad campaign and the continued need to introduce new portion pack sizes, which have resulted in greater brand awareness and product adoption. However, the greater sized portion packs have reduced the average selling price per K-cup, excluding the Starbucks' (SBUX) premium priced K-cup products.

The competitive nature of the business will continue to grow in the future and with this in mind we wouldn't expect to see any more than 150 basis points of margin appreciation beginning in late 2013 if we account for the company's statements outlined in the most recent quarterly conference call. We don't expect to see margins expand meaningfully in Q1 as this represents a large brewer sales quarter normally, which deteriorates the strength of sales in the quarter due to the product sales mix.

Products & Pipeline

Green Mountain Coffee Roasters continues to be a leader in the single-serve product category through innovation. In February of 2012, the company launched the Vue brewer system with greater functionality and at a price point above its existing Keurig brewer systems. Since the product launch at Bed Bath and Beyond the Vue has rolled out to Kohl's, Target Corp. Macy's (NYSE:M) and a host of other retailers in North America. GMCR's consumer-direct websites now offer more than 50 beverage varieties of Vue packs, choices that represent 70% of the company's best-selling K-Cup items in retail and grocery stores.

In Q4 2012, GMCR introduced the second At Home Vue Brewer, the V600 in select channels with initial manufacturers for adjusted retail price of $209. The product was featured on QVC for $189.99 and GMCR sold 21,900 brewers and sold out during the program. The company now expects to introduce the third At Home Vue model, the V500 by spring 2013 in support of the holiday gifting season at a price point between $149 and $169.

Moreover, during Q4 2012, GMCR introduced the Wellness Brewed collection of beverages including Vitamin Burst and Green Mountain Coffee Antioxidant Blend and Focus Blend. The company also launched an Away From Home Vue brewer incorporating RFID technology. GMCR added Snapple and Costco's Kirkland brand to the K-cup family of brands alongside the launch Eight O'Clock coffee in the grocery channel. With Eight O'Clock coffee K-cups, GMCR effectively answers and addresses the lower priced coffee category. This value proposition offering by GMCR through its licensed Eight O'Clock K-cups, in part, addresses the launch of Grover Square's product launch at Wal-Mart last year. Lastly, but probably the most anticipated launch came from the RIVO, which debut at Bloomingdales during the holiday season. Rivo is the production brainchild of a joint partnership between GMCR and Lavazza. The Keurig Rivo, is a Latte, Espresso and Cappucino system. Based on early feedback and sales of the Keurig Rivo system, GMCR is working with Lavazza to ramp production so that they can expand product availability. (GMCR acts as a distributor and co-creator of the Rivo Brewer).

Looking Forward

Green Mountain Coffee Roasters has created an economic moat around the company based on brand dominance and offering a value proposition to the consumer. The company will continue to bring to market new, innovative products, which will serve to enhance the business and the respective product category.

International expansion will remain a key objective for the company, but with current capacity utilization initiatives yet to be realized through gross margins, we wouldn't expect to see meaningful international expansion in 2013 without further deteriorating margins. A recent SEC filing depicts the appointment of Gerrard Geoffrion to head-up GMCR's exploration of international expansion. Any international expansion will require the company to take on distribution partners, as such, we look forward to near-term announcements related to this development.

Additional K-cup brand partnerships will continue to add to the library of K-cup offerings in 2013 as the company looks to expand existing partnership licensed brands and adds new licensed partnerships. Capital Ladder Advisory Group would suggest that as the beverage industry undergoes dramatic consumer demand shifts, producers will continue to look for alternative revenue streams via the At Home market. Campbell (NYSE:CPB) is one such partner that has seen sales volume deterioration in recent years and we feel the company could add value and relevance to GMCR's new Wellness Brand K-cup category via V-8 Splash and V-8 Fusion flavor K-cups. Campbell's recently landed licensed co-branding deals with Wal-Mart's Esio machine and SodaStream (NASDAQ:SODA). It's not out of the question for McDonald's (NYSE:MCD) to also begin licensing K-cups through GMCR in the future as we understand the two companies have continued a near four-month communication on the topic.

Dr. Pepper Snapple Group's (NYSE:DPS) recent licensing agreement with GMCR further defines the point, which shows beverage producers are witnessing sales and volume declines in the CSD business segment and need to compensate with additional sources of revenue. A recent report from the Wall Street Journal highlighted a near 5% decline in CSDs. Sales, in dollar terms, skidded 2.5% in the 12 weeks ended December 30 from a year earlier, and were down 2.8% when counting just December, according to SymphonyIRI Group, after soda makers raised prices, further damping demand. By volume, sales fell 3.55% in the 12-week period and 4.9% for December. The major beverage producers don't just sell carbonated beverages as they sell a variety of beverage products, including water, teas, juices, vitamin drinks etcetera.

The International Home and Housewares Show begins the first week of March. Green Mountain Coffee Roasters will participate in the biggest Home show of the year and Capital Ladder Advisory Group will be in attendance representing the financial community and clients' interests on both the long and short side respectively. Last year GMCR signed many lucrative deals at the Show as buyers flocked to Chicago from all around the world.

Disclosure: I am long GMCR. 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.