Green Mountain Warns, But Announces Buyback

| About: Keurig Green (GMCR)

After the bell on Wednesday, Green Mountain Coffee Roasters (GMCR) released its fiscal third quarter results. It was a very mixed report, but it left investors souring over the growth forecast that was lowered again. The growth of this name has been seriously questioned.

Now, I analyzed this name during the quarter, and noted that expectations were too high. I stated that quarterly revenue estimates needed to be around $860 million or lower for this company to beat, and that full year guidance of $3.65 to $3.8 billion was more realistic. Since analyst estimates did not come down, the company missed, but this shouldn't have been a surprise.

Overall Results:

Green Mountain reported revenues of $896.2 million, up 21% over the prior year period. However, this number was a bit below expectations for $873.3 million. On the bottom line, non-GAAP earnings per share came in at $0.52, two cents ahead of estimates. Like in past quarters, Green Mountain had no trouble beating on the bottom line, it was the top line that caused the trouble.

The table below shows Green Mountain's sales per product category, taken from the quarterly results.

The following table shows how Green Mountain's margins fared in the quarter, compared to prior year periods.

Q3 Margins 2009 2010 2011 2012
Gross 33.64% 34.39% 36.82% 34.90%
Operating 11.96% 11.98% 16.64% 14.93%
Profit 7.42% 5.81% 7.94% 8.46%

Green Mountain's gross margins fell because the cost of goods sold rose 24.9%, more than the 21.2% rise in revenues. However, the basis point decline in operating margins was not as severe, because operating expenses only rose 19.9% for the period. Selling and operating expenses rose 23.5%, while general and administrative costs only rose 12.9%.

On the bottom line, Green Mountain's profit margins expanded only because interest costs were much less, just over $6 million in the period, compared to the prior year period of nearly $32 million. However, that fact was offset by an increased effective tax rate, from 35.81% to 39.62%.

Balance Sheet / Stock Buyback:

The following table shows some key financials taken from the balance sheet. The first two columns are the prior two years, followed by this year's Q2 and then today's reported results (dollar values in thousands). The balance sheet has been an issue in the past.

Key Financials 6/26/10 6/25/11 3/24/12 6/23/12
Cash, Equivalents $8,981 $76,138 $146,003 $138,988
Inventory $186,262 $417,496 $602,121 $667,005
Current Ratio 1.86 2.14 2.36 2.46
Working Capital $164,191 $449,292 $663,656 $687,296
Debt Ratio 44.68% 36.80% 35.08% 33.63%
LT Debt / Equity 38.12% 22.94% 20.09% 18.05%
Liabilities / Equity 80.78% 58.23% 54.05% 50.67%
Diluted Shares 137.9 153.3 159.4 159.4

The balance sheet did improve a bit over both the prior year and prior quarter periods. The current ratio and working capital both increased. The debt (liabilities to assets) ratio declined a little. Inventories rose again, which is concerning, because the company keeps missing on revenues. They obviously are not selling everything, so I don't know why they continue to have so much money tied up in inventory.

Now there is one positive in this report, as seen from the quote below:

"Based on expectations for future growth and the Company's ability to generate meaningful free cash flow in 2013 and 2014, the Board of Directors has decided to strategically deploy its capital by authorizing the repurchase of common shares from time to time depending on market conditions," said Michael J. Mardy, Interim Chairman of GMCR's Board of Directors.

Green Mountain has decided to buy back $500 million worth of its shares over the next two years. Based on Wednesday's close of $17.91, that amounts to almost 28 million shares. That's quite a large amount, since the outstanding share count stands at 155.5 million. However, Green Mountain's share count has been rising in recent years due to acquisitions and executive option dilution, so don't expect this buyback to reduce the share count by that full amount. Part of this buyback will be to stop the rise in the share count.

Forward Guidance:

Remember how I said expectations needed to be lower? Well, here is why I said that. Green Mountain issued guidance that was a bit below what the street was expecting.

For the fiscal fourth quarter (fiscal year ends in September):

  • Total net sales in the range of $889.9 million to $925.5 million. That's well below the $952 million expected.
  • Fourth quarter 2012 non-GAAP earnings per diluted share in a range of $0.45 to $0.50 per diluted share. Current estimates called for $0.62.
  • The company also stated the following in regards to its tax rate. "We anticipate the fiscal 2012 fourth quarter tax rate to be similar to the 37.7% year to date tax rate. Last year's fourth quarter tax rate was 23.7% primarily 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 2011."

For the fiscal year ending September 2012:

  • Total net sales in the range of $3.79 billion to $3.84 billion. Analysts expect $3.87 billion. This is why I said expect $3.65 to $3.8 billion if you want them to beat.
  • Fiscal year 2012 non-GAAP earnings per diluted share in a range of $2.21 to $2.26 per diluted share, excluding approximately $0.20 per share due to the amortization of identifiable intangibles related to the Company's acquisitions. Current estimates called for $2.37.

For the fiscal year ending September 2013, the company issued its first set of guidance:

  • Total net sales growth in the range of 15% to 20% over fiscal 2012. Given the midpoint of their guidance for fiscal 2012, this implies $4.39 billion to $4.58 billion. Analysts were currently expecting $4.72 billion.
  • 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. Analysts were looking for $2.97 in earnings.

Other Items of Note:

Overall, this miss should not have been much of a surprise. We saw last week that Starbucks (SBUX) reported a terrible quarter, and that sent shares of that company lower. If Starbucks cannot do well in this environment, Green Mountain probably won't either. That's because in recent quarters, Green Mountain has been doing bad even when Starbucks has been doing well.

Don't expect a Green Mountain buyout anytime soon. Yes, there was a recent acquisition of Peet's Coffee and Tea (PEET). Green Mountain shares initially rose on the buyout news but quickly retreated. There have been additional rumors that Starbucks might come in and sweeten the offer for Peet's. For now, don't assume that Green Mountain is next. Given how the growth has been sluggish, I don't see Green Mountain being acquired in the short term.

Expect a few other names to trade down if Green Mountain does. Coffee Holding Company (JVA) and SodaStream (SODA) tend to trade in sympathy with GMCR. Coffee Holding Co., Inc. engages in manufacturing, roasting, packaging, marketing, and distributing roasted and blended coffees in the United States and Canada. Coffee Holding Company shares tend to mirror movements in Green Mountain, since they are another coffee name. SodaStream, which is the company behind the soda makers for home use, tends to trade with GMCR because it is another momentum and high growth name, as well as a favorite of short sellers. SodaStream is in much better shape than Green Mountain currently, but investors seem to trade them together since they are both names that make "products for the home".

Conclusion - Warning expected, buyback surprising:

I really wasn't surprised that Green Mountain's numbers were so-so and that guidance was below expectations. This company has had a hard time meeting revenues lately, and they missed in Q3 even after a huge warning at last quarter's result had reduced expectations tremendously. This guidance was terrible, and proves that Green Mountain is not growing as fast as many would have liked. The buyback is intriguing though, because it covers a large amount of shares. That should help support the name a little.

Green Mountain shares initially dropped about 15% on the news in after-hours trading, but had recovered most of those losses by around 5PM. To me, this warning was mostly priced in, but it is still an issue. The buyback will definitely boost confidence in the name for the short term, but if they warn again next quarter, this stock will go lower. It's already dropped from $115 to $18, but there is still downside.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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