Specialty coffee retailer Green Mountain Coffee Roasters Inc. (GMCR), delivered robust first-quarter 2014 adjusted earnings of 96 cents per share which beat the Zacks Consensus Estimate of 89 cents by 7.8% and surpassed the company’s guidance of 85 cents–90 cents.
Earnings also surpassed the year ago quarter results by 26%. Adjusted earnings excluded amortization of identifiable intangibles and SEC-inquiry related expensesy 26%.
Profit was on the upswing on the back of solid top-line improvement and enhanced operational efficiencies.
Consolidated Revenues and Margins
Green Mountain’s quarterly net sales rose 4.0% to $1.4 billion from $1.3 billion in the comparable prior-year quarter, backed by 8% growth in the sales of K-cups and Vue packs.
Approximately 94% of fourth-quarter fiscal 2013 net sales was contributed by the sales of Keurig Single Cup Brewers, portion packs and Keurig-related accessories, with the remainder coming from bagged coffee, fractional packs and the Canadian office coffee services business.
Net sales of Single Serve Packs increased 8.0% year over year to $931.4 million due to a substantial 12 percentage points surge in volume, partially offset by mix and pricing headwinds.
Net sales of Brewers and Accessories slipped 1.0% from the comparable prior-year quarter to $375.1 million mainly due to unfavorable product mix and price realization and decline in accessory net sales.
Net sales of Other products slipped 18% to $80.2 million due to a demand shift from traditional coffee package formats to single-serve packs, mainly in Canada.
Green Mountain reported record sales of brewers and packs in spite of a challenging retail environment where holiday sales were disappointing for many retailers.
Gross profit went up 11% to $464.0 million backed by higher revenues. Gross margin inflated 220 basis points (bps) to 33.5% due to favorable green coffee costs and strong revenue.
Adjusted operating income went up 22% to $238.2 million. Adjusted operating margin inflated 270 bps to 17.2% backed by favorable green coffee costs and positive pricing
Global Strategic Partnership with Coca Cola Company
Green Mountain entered into a 10-year partnership with beverage giant The Coca Cola Company (KO) which will allow consumers to make its sodas and other drinks at home. Also, Coca-Cola is taking a 10% stake in Green Mountain for about $1.25 billion. The news drove Green Mountain’s share price significantly higher in after-market trading.
Under the deal, Green Mountain will exclusively make Coca-Cola branded pods for use on its upcoming Keurig Cold at-home beverage system that will make cold beverages. Coca-Cola will also work with Green Mountain on the development and launch of this latest version of Keurig single-cup brewer.
Green Mountain will also enjoy the sole right to sell and distribute Coca-Cola Company-branded single-serve, pod-based cold beverages.
As part of the deal, Coca Cola will buy almost 16.6 million shares of Green Mountain for a total cost of $1.25 million, representing 10% minority stake in the company.
Other Financial Details
During the quarter, Green Mountain repurchased 10.5 million shares at a total cost of $387 million.
Guidance for Fiscal 2014
Green Mountain reaffirmed its sales guidance for the underlying business but raised its sales outlook for the fiscal 2014 to reflect the benefits from the partnership with Coca Cola.
The company reaffirmed its adjusted earnings per share guidance in a range of $3.75 to $3.85. Sales are expected to grow in high single-digit range from 2013 levels better than prior expectation of a mid single-digit range. Free cash flow is estimated in the range of $200–$300 million.
Guidance for Q2 Fiscal 2014
Green Mountain also provided its outlook for second-quarter 2014. The company expects adjusted earnings per share in the range of 93 cents–98 cents and sales growth in the range of low-to-mid single digit. The guidance reflects the company’s continuous efforts to increase brand investments and product innovations.
GMCR aims to achieve double-digit growth in annual revenues and annual earnings growth in the mid-teens over the long term.
The Zacks Consensus Estimate for first-quarter and fiscal 2014 earnings are pegged at $1.05 and $3.84 per share, respectively.
Other Stocks to Consider
GreenMountaincurrently carries a Zacks Rank #1 (Strong Buy). Other consumer staples stocks worth considering are Tyson Foods Inc. (TSN), Constellation Brands Inc. (STZ) and The Hain Celestial Group Inc. (HAIN). All these stocks carry the same Zacks Rank as Green Mountain.
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