Keurig Green Mountain (GMCR, Financial) has evolved from a mere coffee house to a giant in the single-serve brewing industry and has eventually rewarded its long-term investors with ample profits for staying invested in the long run. But presently the future of the coffee brewer is under scanner, though it posted fabulous fourth quarter numbers in the fiscal year that exceeded analysts’ expectation after the final release on November 19. In fact, after the results got declared on Wednesday afternoon, the stock price reacted negatively, though the quarter report was a good one and plunged about 1.88% in after-hours trading. Let’s take a closer look at how Keurig Green Mountain did in the quarter and the full year, and get a bird’s eye view of what’s next for the company going forward. And also we need to understand why investors are tensed on their investments in the specialty coffee and coffeemaker company’s stock. Here’s the total story.
The blowout final quarter
Keurig Green Mountain reported fourth quarter top and bottom lines which surpassed the analysts’ estimates. The coffeemaker company reported revenue that climbed 14% to $1.2 billion, up from $1.05 billion a year ago and also reported full-year fiscal revenue of $4.7 billion from $4.36 billion reported in the previous fiscal year. The fourth quarter top-line growth clearly outpaced the 11% growth rate most investors had expected to see during the quarter.
Non-GAAP earnings rose to $0.90 per share from $0.89 a share a year ago for the final quarter, and from $3.39 a share to $3.93 a share for the entire year.
While everything in Keurig’s quarter looked excellent, there were some concerns which were not very apparent. On the positive side, sales of K-cup portion packs improved 22% year over year to $948.7 million as volume improved on lower-selling prices. It would be better to keep ourselves reminded that more than 80% of Keurig’s total revenue is earned through portion pack sales. However, on the negative side, the sales of brewers and accessories fell 5% to $181.6 million from the previous year’s fourth quarter and sales from royalty income and other products fell by a whopping 17% to $65.3 million. The company sold 2.4 million Keurig brewers in the quarter and has blamed the decline in sales on a provision related to its “Mini Plus” brewer line, which offset the sales record. For the other products net sales became sluggish as there has been a demand shift from traditional coffee packages to single-serve packs in the U.S.
Nevertheless, the growth in top and bottom lines for the full year has been solid, with 8% higher revenue generating a 21% rise in adjusted net income and a 16% gain in adjusted earnings per share. Again portion packs led the gains, while brewer sales and other products took the backseat.
What investors are concerned about?
While providing the upcoming fiscal year’s guidance the company stated that it expects adjusted earnings per share to increase in a range of mid to high single-digits. Also, the company claims that it urges to achieve high single to low-double digit growth in annual revenues for the next fiscal year.
The company expectations have rather fallen short of investor expectations that are hooked to net sales growth of 16% for fiscal 2015. With respect to the earnings guidance it seems to be in line with the views of stock analysts, but still fails to assure investors of remarkable gains. Moreover, the specific first-quarter earnings guidance of fiscal 2015 meted out stands at a range between $0.83 a share to $0.88 per share that is well below the $0.96 per share consensus among those following the stock movement.
This disappointment among the stock investors has led the shares fall another 2% soon after the final earnings release.
What the company is looking ahead to
From a strategic standpoint, Keurig has plenty of things to look forward to. And maybe that’s why the company remains confident of continuing the growth trajectory though investors are a bit shaken on the future forecast. The management is upbeat on achieving high growth which would aid in adding value to shareholders by generating solid cash flow. In a recent move, Keurig chose to increase its quarterly pay-out by 15% to $0.2875 a share.
CEO Brian Kelley stated during the earnings call, “We remain focused on what we believe is a significant opportunity to grow and premiumize home beverages in both our hot and cold platforms. We'll continue to invest and execute behind this opportunity, given the powerful brand connection we've built with consumers and our successful track record of introducing disruptive and innovative products.”
In fact, as the Keurig brewer has been able to create a mark in the coffee brewing industry, new products such as the long-awaited Keurig Cold could deliver excellent gains – though very high expectations set by analysts and investors may lead to disappointment.
Concluding thoughts
In the coming quarters, Keurig needs to execute on its current strategies to ensure that the track record of success continues in the years to come. Investors are confused with the weak guidance given by the company management who have probably taken a cautious stand, as there is a shift in management responsibility round the corner with CFO Frances Rathke leaving the company by next year. Yet, the CEO is optimistic on the strong balance sheet and healthy free cash flow generation which are advantageous for the company as well as its investors who would get ultimately rewarded with share repurchases and dividends in the long run.
