Keurig Green Mountain Inc (NASDAQ:GMCR), a personal beverage system company that has revolutionized the way consumers create and enjoy beverages, today announced its business results for the 13 weeks and 52 weeks ended September 26, 2015.

“Our results for the quarter and the year reflect the competitive and dynamic marketplace in which we operate as well as the steps we are taking to position our Company for longer-term growth and value creation,” said Brian Kelley, Keurig’s President and CEO. “I’m particularly pleased with the benefits realized from our cost reduction efforts as well as our strong cash generation, both of which exceeded expectations in the fourth quarter. While we expect marketplace conditions will remain challenging in the near term, we have a stronger product line-up and price positioning as we enter the new holiday season.”

Mr. Kelley continued, “Our priorities for 2016 are to reinvigorate our hot system and continue the disciplined rollout of our Kold system. We remain confident that our investments in the business and our multi-year productivity program will deliver long-term value to shareholders. Today’s announcement of the Board’s authorization of a 13% increase in our dividend underscores our confidence in our future prospects and continues our track record of delivering strong cash returns to our shareholders.”

Fourth Quarter Fiscal 2015 Financial Review

           
    Thirteen
weeks ended
  Thirteen
weeks ended
   
($ in millions except earnings per share)   Sept 26, 2015   Sept 27, 2014   % Increase /
(Decrease)
Net sales   $ 1,037.0   $ 1,195.6   (13 )%
Operating income:            
GAAP   $ 144.2   $ 228.8   (37 )%
Non-GAAP     197.0   $ 248.0   (21 )%
Net income:            
GAAP   $ 94.6   $ 141.1   (33 )%
Non-GAAP   $ 131.3   $ 153.8   (15 )%
Diluted income per share:            
GAAP   $ 0.61   $ 0.86   (29 )%
Non-GAAP   $ 0.85   $ 0.94   (10 )%
             
Note: Complete GAAP to Non-GAAP reconciliation tables provided with this release.

Net Sales by Product

Net sales of $1.0 billion decreased 13% versus the prior year period with declines in brewer sales and pod sales. The net sales decline includes an unfavorable impact from foreign currency exchange rates of approximately 2%.

               
                 
    Thirteen weeks ended   Thirteen weeks ended        
($ in millions)   Sept 26, 2015   Sept 27, 2014   $ Increase
(Decrease)
  % Increase
(Decrease)
Pods   $ 861.2   $ 948.7   $ (87.5 )   (9 )%
Brewers and accessories     123.6     181.6     (58.0 )   (32 )%
Subtotal     984.8     1,130.3     (145.5 )   (13 )%
Other products and royalties     52.2     65.3     (13.1 )   (20 )%
Total net sales   $ 1,037.0   $ 1,195.6   $ (158.6 )   (13 )%
                           

Pods

  • Pod net sales were driven by a 4% decrease in equivalent servings2 volume and an approximately 6% decrease due to product mix. This was partially offset by an approximately 2% increase due to net price realization.3 Foreign currency exchange rates negatively impacted pod net sales by approximately 2%.
  • For the Company’s U.S. At Home business, pod volumes fell by 3%. The Company typically sees a build in customer and retailer inventory in the fourth quarter in advance of the holiday season. In the fourth quarter of 2014, the Company saw a much larger build in such inventories, due in part to the SAP transition in the first quarter of 2015. While shipments were impacted by this comparison, consumer demand for pods as measured by retail sales remains healthy. The Company estimates that retail unit sales of pods grew 7% in the fourth quarter of 2015.

Brewers and Accessories

  • For the quarter, 1.9 million Keurig® hot system brewers were sold including 1.8 million sold by Keurig with 0.1 million reported sold by Keurig’s licensed brewer partners. This brewer shipment number does not account for consumer returns.
  • Brewer sales were driven by a 20% decrease in sales volume, an approximately 10% decrease due to product mix and an approximately 1% decrease due to net price realization. Foreign currency exchange rates negatively impacted brewer and accessory net sales by approximately 1%.

Other Products

  • Sales of other products were driven by the unfavorable impact of foreign exchange rates, the loss of a customer in our away from home channel and our decision to focus and allocate resources on our pod business.
  • For the quarter, GAAP gross margin declined 530 basis points to 32.3% of net sales from 37.6% in the prior year period. Non-GAAP gross margin declined approximately 300 basis points to 34.7% of net sales from 37.6% in the prior year period. An $8.6 million obsolescence charge related to BOLT® brewers negatively impacted both GAAP and Non-GAAP gross margin. An abandonment and impairment of packaging lines negatively impacted GAAP gross profit by $24 million and was excluded from Non-GAAP gross profit. The following table quantifies the changes in gross margin period to period:
   
     
    Change from Q4
Fiscal 2014 to
Q4 Fiscal 2015
Impairment and abandonment of packaging lines   -230   bps
Unfavorable green coffee costs   -220   bps
Shift in sales mix between pods, brewers and accessories, and other products   210   bps
Higher obsolescence expense of finished goods   -120   bps
Mix primarily associated with pods   -110   bps
Sales return favorability   70   bps
Foreign currency rates   -60   bps
Other items   -70   bps
GAAP margin change   -530   bps
Impairment and abandonment of packaging lines   230   bps
Non-GAAP margin change   -300   bps
  • GAAP SG&A declined 20%, representing 17.0% of net sales for the quarter as compared to 18.5% in the prior year period. Non-GAAP SG&A decreased 20% representing 15.7% of sales for the quarter as compared to 16.9% in the prior year period. The decrease in Non-GAAP SG&A over the prior year period was primarily driven by declines in marketing expense and compensation expense.
  • GAAP operating income declined 37%, representing 13.9% of net sales for the quarter, compared to 19.1% in the prior year period.
  • Non-GAAP operating income declined 21%, representing 19.0% of net sales in the quarter, compared to 20.7% in the prior year period.
  • The Company’s effective income tax rate was 32.3% for the quarter as compared to 35.2% in the prior year period.
  • Diluted weighted average shares outstanding for the fourth quarter were 155.2 million, down 6% from 164.4 million in the prior year period. The reduction in shares outstanding from the prior year quarter 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 29% from the prior year period to $0.61.
  • Non-GAAP diluted EPS declined 10% from the prior year period to $0.85.

Fiscal Year 2015 Financial Review

           
($ in millions except earnings per share)   Fiscal 2015   Fiscal 2014   % Increase /
(Decrease)
Net sales   $ 4,520.0   $ 4,707.7   (4 )%
Operating income:            
GAAP   $ 765.4   $ 947.2   (19 )%
Non-GAAP   $ 861.0   $ 1,001.2   (14 )%
Net income:            
GAAP   $ 498.3   $ 596.5   (16 )%
Non-GAAP   $ 565.8   $ 632.9   (11 )%
Diluted income per share:            
GAAP   $ 3.14   $ 3.74   (16 )%
Non-GAAP   $ 3.56   $ 3.97   (10 )%
             
Note: Complete GAAP to Non-GAAP reconciliation tables provided with this release.
 

Net Sales by Product

For the year, net sales of $4.5 billion declined 4% over the prior year. The 4% net sales decline includes an unfavorable impact from foreign currency exchange rates of approximately 1%.

               
Net Sales by Product                
($ in millions)   Fiscal 2015   Fiscal 2014   $ Increase
(Decrease)
  % Increase
(Decrease)
Pods   $ 3,645.1   $ 3,604.5   $ 40.6     1 %
Brewers and accessories     632.6     822.3     (189.7 )   (23 )%
Subtotal     4,277.7     4,426.8     (149.1 )   (3 )%
Other products and royalties     242.3     280.9     (38.6 )   (14 )%
Total net sales   $ 4,520.0   $ 4,707.7   $ (187.7 )   (4 )%

Pods

  • For the year, approximately 10.5 billion equivalent pod servings were sold.
  • Pod sales were driven by an increase of approximately 7% due to equivalent servings volume and a 2% increase due to net price realization partially offset by a roughly 7% decrease due to product mix. Foreign currency exchange rates negatively impacted pod net sales by approximately 1%.

Brewers and Accessories

  • For the year, 9.2 million Keurig® hot system brewers were sold including 8.7 million sold by Keurig with 0.5 million reported sold by Keurig’s licensed brewer partners. This brewer shipment number does not account for consumer returns.
  • Brewer net sales were driven by a decrease of 16% due to sales volume, a 5% decline in net pricing and a roughly 1% decrease due to product mix. Foreign currency exchange rates negatively impacted brewer net sales by approximately 1%.
  • Additionally, accessories net sales decreased by $15 million.

Other Products

  • Sales of other products were primarily driven by the unfavorable impact of foreign exchange rates as well as the loss of a customer in our away from home channel and our decision to focus and allocate resources on our pod business.
  • For the year, GAAP gross margin declined 300 basis points to 35.6% of net sales from 38.6% in the prior year period. Non-GAAP gross margin declined 250 basis points to 36.1% of net sales from 38.6% in the prior year period. GAAP and Non-GAAP gross margin were negatively impacted by $36 million in obsolescence charges related to Rivo®, Bolt® and certain Keurig 2.0 brewers. Losses on abandonment and impairment of packaging lines negatively impacted GAAP gross profit by $24 million and was excluded from Non-GAAP gross profit. The following table quantifies the changes in gross margin period to period:
   
     
    Change from
Fiscal 2014 to
Fiscal 2015
Shift in sales mix between pods, brewers and accessories, and other products   250   bps
Mix primarily associated with brewers   -160   bps
Higher obsolescence expense of finished goods   -160   bps
Unfavorable green coffee costs   -140   bps
Mix primarily associated with pods   -90   bps
Impairment and abandonment of packaging lines   -50   bps
Other items   50   bps
GAAP margin change   -300   bps
Impairment and abandonment of packaging lines   50   bps
Non-GAAP margin change   -250   bps
 
  • GAAP SG&A declined 5%, representing 18.3% of sales for the year as compared to 18.5% in the prior year period. Non-GAAP SG&A decreased 5% representing 17.0% of sales for the year as compared to 17.3% in the prior year period. The decrease in Non-GAAP SG&A over the prior year period was driven by declines in compensation expense and marketing expense partially offset by higher research and development expenses and significant investments in the Keurig KOLDTMbeverage ®system.
  • GAAP operating income declined by 19%, representing 16.9% of net sales for the year, down 320 basis points from 20.1% in the prior year period.
  • Non-GAAP operating income decreased by 14%, representing 19.0% of net sales in fiscal year 2015, down 230 basis points from 21.3% in the prior year.
  • The Company’s effective income tax rate was 33.6% for the year as compared to 35.4% in the prior year.
  • Diluted weighted average shares outstanding for the full year were 158.9 million, down from 159.6 million in 2014. The reduction in shares outstanding was driven by the Company’s share repurchases under its share repurchase program 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, partially offset by dilution from the Coca-Cola and Lavazza equity transactions4.
  • GAAP diluted EPS decreased 16% from the prior year period to $3.14; non-GAAP diluted EPS decreased 10% from the prior year period to $3.56.

Balance Sheet & Cash Flow Highlights

Balance Sheet & Cash Flow Highlights ($ in millions) September 26, 2015 September 27, 2014 % Change
Cash and cash equivalents, including restricted cash $ 89.8 $ 761.6 (88 )%
Accounts receivables, net $ 517.9 $ 621.5 (17 )%
Inventories $ 692.0 $ 835.2 (17 )%
Raw materials & supplies $ 227.5 $ 169.9 34 %
Coffee $ 126.4 $ 74.4 70 %
Packaging & other raw materials $ 101.1 $ 95.5 6 %
Finished goods $ 464.5 $ 665.3 (30 )%
Brewers & accessories $ 314.7 $ 477.5 (34 )%
Pods $ 133.7 $ 164.9 (19 )%
Other $ 16.1 $ 22.9 (30 )%
Debt outstanding and capital lease and financing obligations $ 451.5 $ 278.5 62 %
Cash provided by operating activities (1) $ 754.9 $ 719.4 5 %
Free cash flow (1) $ 343.8 $ 381.6 (10 )%

(1) Free cash flow is calculated by subtracting capital expenditures for fixed assets from net cash provided by operating activities as reported in the unaudited statement of cash flows.

Productivity Program

The Company previously announced a multi-year productivity program and continues to expect $300 million in savings over the next three years with approximately $100 million of savings in fiscal 2016.

The Company incurred $16 million in pre-tax charges related to its restructuring and productivity programs in its fiscal fourth quarter 2015 of which $12 million are expected to result in cash expenditures. Pre-tax restructuring charges associated with the productivity program are expected to be $14-$19 million in fiscal year 2016 of which approximately $10-14 million are expected to be cash expenditures.

Share Repurchases

Pursuant to the Company’s share repurchase program, the Company repurchased 9.5 million shares in fiscal year 2015 at a cost of $1,033 million. This includes 1.99 million shares repurchased in the fiscal fourth quarter at a cost of $115 million. From the end of the Company’s fiscal year 2015 through November 18, 2015, the Company repurchased an additional 4.4 million shares at a cost of $235 million.

As of November 18, 2015, the Company has $914 million remaining on its share repurchase authorization.

Dividend Declaration

Reflecting its commitment to return capital to shareholders and its expectation for continued strong cash flow generation, the Company announced a 13% increase in its indicated annualized dividend to $1.30 per share from $1.15. The increase will take effect with the February 16, 2016 quarterly dividend payment of $0.325 declared by the Board payable to shareholders of record as of the close of business on January 15, 2016.

Business Outlook and Other Forward-Looking Information

The Company provided its outlook for fiscal year 2016:

Fiscal Year 2016

  • Currency neutral net sales growth of flat to low single digits compared to fiscal year 2015. At current exchange rates, foreign currency is expected to negatively impact net sales growth by approximately 1%.
  • An annual effective tax rate of approximately 33.0 % to 33.5%.
  • Non-GAAP earnings per share of $3.25-$3.45. This includes an expected $100 million in productivity savings, additional share repurchase, an approximately $0.16negative impact from foreign currency at current exchange rates. The midpoint of the guidance range includes a pre-tax estimated income statement loss of $125 million from the Keurig® KOLDTM beverage system. Non-GAAP EPS guidance excludes any restructuring or one-time charges related to the Company’s productivity initiative.
  • Free cash flow in the range of $420 million to $500 million.
  • Capital investment in the range of $225 million to $275 million, with total depreciation and amortization expense of $290 million. (Original Source)

Shares of Green Mountain Coffee are up 15.36% to $46.72 in after-hours trading. GMCR has a 1-year high of $158.87 and a 1-year low of $39.80. The stock’s 50-day moving average is $52.10 and its 200-day moving average is $67.00.

On the ratings front, Green Mountain has been the subject of a number of recent research reports. In a report released yesterday, Wedbush analyst Philip Terpolilli maintained a Hold rating on GMCR, with a price target of $50, which implies an upside of 24.0% from current levels. Separately, on November 11, Suntrust Robinson Humphrey’s William Chappell maintained a Hold rating on the stock and has a price target of $50.

According to TipRanks.com, which ranks over 7,500 financial analysts and bloggers to gauge the performance of their past recommendations, Philip Terpolilli and William Chappell have a total average return of -14.1% and 4.0% respectively. Terpolilli has a success rate of 5.6% and is ranked #3619 out of 3849 analysts, while Chappell has a success rate of 59.1% and is ranked #1537.

The street is mostly Neutral on GMCR stock. Out of 6 analysts who cover the stock, 5 suggest a Hold rating and one recommends to Sell the stock. The 12-month average price target assigned to the stock is $66.00, which represents a potential upside of 63.7% from where the stock is currently trading.

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.