Keurig Green Mountain Inc (NASDAQ:GMCR), a leader in specialty coffee, coffee makers, teas and other beverages with its innovative brewing technology, today announced its business results for the 13 weeks ended June 27, 2015.
“While we are not pleased with our revenue growth, we delivered earnings at the high end of our previous guidance,” commented President and CEO, Brian Kelley. “We are taking decisive actions to adapt and compete more effectively in today’s rapidly-evolving, dynamic marketplace. We are implementing a multi-year productivity program that we are confident will enhance our operational effectiveness and enable us to fund incremental investment in innovation and brand building. In addition, our new Keurig K200 brewer is off to a strong start with its introduction this past quarter. We believe this addition, as well as the enhancements we’ve made to our entire At Home brewer line up will allow for continued growth in our U.S. installed base. We continue to believe that our hot system has the potential to reach more than 50 million U.S. households over time –more than double its size today. In addition, the upcoming launch of our Keurig KOLD system creates an even larger opportunity for long-term growth and value creation.”
Mr. Kelley continued, “Going forward, we will continue to maintain a strong, flexible capital structure and balance sheet to enable us to return significant value to our shareholders as we continue to invest in the business. Underscoring our commitment to delivering value to our shareholders, today we announced that our Board authorized an additional $1 billion share repurchase which adds to our existing plan. With innovative technology and a premier beverage brands portfolio, Keurig continues to be a recognized leader in the industry and we are confident we will continue our legacy of delivering disruptive and innovative products for the benefit of all Keurig constituents.”
Net Sales by Product
Net sales of $970 million decreased 5% versus the prior year period with declines in brewer sales and pod sales. Foreign currency exchange rates negatively impacted sales by approximately 1.5 percentage points. Excluding the impact of foreign currency exchange rates, total net sales declined 4% and total Keurig beverage system sales declined 4% compared to the prior year period.
Net sales for the domestic segment declined 4% in the quarter while sales in the Canada segment declined 14% on a reported basis and declined 3% excluding the impact of foreign currency exchange rates.
Total pod net sales declined 1% in the quarter while brewers and accessories net sales declined 26%. Other product net sales declined 12% compared to the prior year period.
- The 1% decrease in the quarter in pod net sales compared to the prior year period was due to a 5% increase in equivalent servings2 volume and a 3 percentage point increase due to net price realization. This was offset by an 8 percentage point decrease due to product mix and a roughly 1 percentage point negative impact from foreign currency exchange rates.
Brewers and Accessories
- For the quarter, 1.36 million Keurig® system brewers were sold including 1.3 million sold by Keurig and 0.05 million reported sold by Keurig’s licensed brewer partners. This brewer shipment number does not account for consumer returns.
- The 26% decline in Keurig’s brewer and accessory net sales compared to the prior year period was primarily due to a 18% decline in brewer sales volume, driven by high levels of inventory at retail and timing of restocking the MINI Plus brewer. Brewer net price realization declined by 6 percentage points due to promotional efforts to reduce brewer inventory levels. Brewer mix negatively impacted brewer sales by 2 percentage points. Foreign currency exchange rates negatively impacted brewer net sales by roughly 1 percentage point.
- Additionally, accessory net sales declined 22% compared to the prior year period.
- Sales of other products declined 12% during the quarter from the prior year period primarily due to the continuing demand shift from traditional coffee package formats to pods and the unfavorable impact of foreign currency exchange rates.
- For the quarter, gross margin declined 750 basis points versus prior year to 36.0% of net sales. The table below quantifies the changes in gross margin period to period. Obsolescence of finished goods includes an $18 million charge related to Keurig 2.0 brewers in the third quarter which impacted gross margin by 190 bps.GAAP SG&A declined 12%, representing 19.4% of net sales for the quarter as compared to 20.9% in the prior year period. Non-GAAP SG&A decreased 14% representing 17.8% of sales for the quarter as compared to 19.7% in the prior period. The decrease in SG&A over the prior year period was driven by lower incentive compensation expense, lower marketing expense and a reduction in professional fees.
- GAAP operating income declined 30%, representing 16.6% of net sales for the quarter, compared to 22.6% in the prior year period.
- Non-GAAP operating income declined 28%, representing 18.2% of net sales in the quarter, compared to 23.8% in the prior year period.
- The Company’s effective income tax rate was 30.2% for the quarter as compared to 33.9% in the prior year period.
- Diluted weighted average shares outstanding for the third quarter were 155.6 million, down 6% from 164.7 million in the prior year period. The reduction in shares outstanding was driven by the Company’s share repurchases under its previously announced share repurchase authorizations including a $700 million accelerated share repurchase (ASR) program, open market purchases and 10(b)5-1 plans and the previously announced repurchase of 5.2 million shares from Luigi Lavazza S.p.A. on March 3, 2015.
- GAAP diluted EPS declined 22% from the prior year period to $0.73.
- Non-GAAP diluted EPS declined 19% from the prior year period to $0.80. Excluding the impact of foreign currency, non-GAAP diluted EPS decreased approximately 17% versus the prior year period.
On July 31, 2015, the Board of Directors approved a new share repurchase authorization of up to an additional $1 billion over the next two years, at such times and prices as determined appropriate by the Company’s management in collaboration with the Board of Directors. The shares will be purchased with cash on hand, cash from operations, and funds available through our existing credit facility.
The Company announced a multi-year productivity program intended to reduce structural costs and streamline organization structures to drive efficiency. The program is expected to generate approximately $300 million in savings over the next three years with approximately $100 million of savings in fiscal 2016. The program is expected to reduce the company’s workforce by approximately 5%.
Implementation of the productivity program is expected to result in cumulative pre-tax charges of $30-$35 million, beginning with an approximately $26 million charge in the fourth quarter of fiscal 2015. Of the total anticipated initial charge, approximately $20 million is expected to be cash expenditures.
Business Outlook and Other Forward-Looking Information
The Company updated its outlook for fiscal year 2015, provided its outlook for the fourth quarter and provided its preliminary outlook for fiscal year 2016.
Fiscal Year 2015 Outlook
- Net sales decline of low-single to mid-single-digits compared to fiscal year 2014
- An annual effective tax rate of approximately 34.5% to 35%
- Non-GAAP EPS decline in the low-teens. This outlook:
- Includes an estimated $0.13 headwind from foreign currency exchange
- Excludes any restructuring or one-time charges related to the Company’s productivity initiative
- Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the Company’s pendingsecurities and stockholder derivative class action litigation and antitrust litigation
- Free cash flow in the range of $150 million to $200 million
- Capital investment in the range of $400 million to $450 million
Fourth Quarter 2015
- Net sales growth decline of low-teens compared to the fourth quarter of fiscal year 2014
- An effective tax rate of approximately 36% to 36.5%
- Non-GAAP EPS in a range of$0.70 to$0.75 which:
- Includes an estimated $0.03 headwind from foreign currency exchange
- Excludes any restructuring or one-time charges related to the Company’s productivity initiative
- Excludes the amortization of identifiable intangibles related to the Company’s acquisitions and legal and accounting expenses related to the Company’s pending securities and stockholder derivative class action litigation and antitrust litigation
Fiscal Year 2016 Outlook
Based upon its preliminary estimates for fiscal 2016, the Company expects its hot business to deliver modest non-GAAP earnings per share growth over fiscal 2015 inclusive of the expected productivity savings. The Company expects that its investment in Keurig KOLD™ in 2016 will be at least $100 million and could be higher depending largely on pod manufacturing efficiencies and channel mix. Our fiscal year 2016 non-GAAP EPS excludes any restructuring or one-time charges related to the productivity program.
With regard to the first quarter of fiscal 2016, the Company expects non-GAAP earnings per share to decline versus the prior year quarter as the Company ships more hot appliances year over year, ships KOLD appliances, ramps production on KOLD pods and faces a significant coffee cost headwind in the first quarter of fiscal 2016.
The Company will update its outlook and provide more details related to fiscal 2016 on its fourth quarter earnings announcement.
Keurig’s Board has declared a regular quarterly cash dividend of $0.2875 per share of the Company’s common stock. The quarterly cash dividend will be paid on October 29, 2015 to shareholders of record as of the close of business on September 29, 2015.
1 Certain items in this press release are designated as “Non-GAAP” and represent non-GAAP financial measures that exclude certain items. Please see the attached “GAAP to Non-GAAP Reconciliation” to find disclosure and reconciliation of non-GAAP financial measures, as well as a discussion in this release as to why the Company is presenting such non-GAAP measures.
2 Equivalent servings translates our multiple pod sizes, including K-Cup®, Vue® K-Carafe® and Bolt® pods, into a common serving. (Original Source)
Shares of Green Mountain Coffee Roasters crashed 28.49% to $54.77 following the earnings release. GMCR has a 1-year high of $158.87 and a 1-year low of $68.72. The stock’s 50-day moving average is $74.72 and its 200-day moving average is $102.45.
On the ratings front, Green Mountain Coffee Roasters has been the subject of a number of recent research reports. In a report released yesterday, Susquehanna analyst Pablo Zuanic reiterated a Buy rating on GMCR, with a price target of $117, which implies an upside of 52.0% from current levels. Separately, on August 3, Morgan Stanley’s Matthew Grainger maintained a Buy rating on the stock and has a price target of $110.
According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Pablo Zuanic and Matthew Grainger have a total average return of 0.9% and 8.7% respectively. Zuanic has a success rate of 40.0% and is ranked #2346 out of 3724 analysts, while Grainger has a success rate of 54.3% and is ranked #1038.
The street is mostly Neutral on GMCR stock. Out of 10 analysts who cover the stock, 5 suggest a Hold rating , 4 suggest a Buy and one recommends to Sell the stock. The 12-month average price target assigned to the stock is $141.67, which implies an upside of 84.1% from current levels.
Keurig Green Mountain Inc is engaged in the coffee and coffeemaker businesses in the United States and Canada. It sells Keurig Single Cup brewers and roast high-quality Arabica bean coffees.