Zacks Investment Research downgraded Farmer Brothers Co. (FARM) to a Zacks Rank #5 (Strong Sell) on Jan 3, following downward estimate revisions since the company reported weaker-than-expected first quarter fiscal 2015 results on Nov 6.
Why the Downgrade?
On Nov 6, this packaged food product company reported weaker-than-expected first quarter fiscal 2015 results, despite performing well year over year. Results fell short of expectations owing to higher coffee prices. Earnings of 16 cents lagged the Zacks Consensus Estimate of 22 cents by 27.3%, while revenues of $136 million lagged the same by 4.05%.
Farmer Brothers has been experiencing increases in green coffee costs since Jan 2014, largely due to increasing prices of Arabica coffee as a result of an ongoing drought in Brazil. Though the company has been passing the costs to its customers through a pricing arrangement, increase in coffee prices have resulted in increase in costs of goods sold.
During the first quarter, cost of goods sold ratio increased 170 basis points (bps) to 64.6% versus 62.9% in the prior year period. As a result, gross margin for the first quarter of fiscal 2015 was 35.4%, 170 basis points lower than the year-ago period.
Besides higher green coffee costs, Farmer Brothers also witnessed increases in freight charges and insurance related costs, which led to higher operating expenses in the first quarter.
The profitability of Farmer Brothers largely depends on the price of green coffee, its main raw material. Coffee prices are highly volatile and are affected by weather and pest infestation. Also political decisions in coffee-producing countries, worldwide supply and demand, the relative strength of the dollar, and speculative trading has also been influencing coffee prices.
The company, however, stated that the recent rainfall in Brazil has eased the cost pressure a bit. But it remains uncertain about the potential drought impact on future harvests.
Other Stocks to Consider
Not all stocks are performing as poorly as Farmer Brothers. Shoe Carnival Inc. (SCVL), Sprouts Farmers Market, Inc. (SFM) and Natural Grocers by Vitamin Cottage, Inc. (NGVC) are better-ranked retailers. While Shoe Carnival sports a Zacks Rank #1 (Strong Buy), Sprouts Farmers and Natural Grocers hold a Zacks Rank #2 (Buy).
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