Keurig Green Mountain Inc.’s GMCR shares declined nearly 2% on Aug 5, after it announced disappointing third-quarter fiscal 2015 results. Although earnings marginally beat the Zacks Consensus Estimate, sales missed the same by a significant margin.
Moreover, Keurig Green Mountain lowered the fiscal 2015 guidance following the dismal results.
Adjusted earnings of 80 cents per share beat the Zacks Consensus Estimate of 79 cents by a penny, but plunged 19% year over year. Soft revenues and weak margins dented profit during the quarter. The figure, however, matched the higher end of management’s guidance range of 75 cents to 80 cents.
Consolidated Revenues and Margins
Keurig Green Mountain's quarterly net sales decreased 5% year over year to $970 million due to decline in sales of pods as well as brewers and accessories. Foreign exchange negatively impacted sales by 1.5 percentage points (pp). Sales declined 4% on a constant currency basis. Net sales also missed the Zacks Consensus Estimate of $1.05 billion by 7.6%. Management cited slower-than-expected installed base growth and intense competition in pods as the reasons behind the downfall.
Gross profit declined 21.4% year over year to $349.3 million due to lower revenues and higher cost of sales. Gross margin shrank 750 basis points (bps) to 36.0% of net sales. Obsolescence of finished inventory related to Keurig 2.0 had a negative impact of $18 million on margins during the quarter.
KeurigGreen Mountain’s much-hyped Keurig 2.0 brewer launched in August 2014 was not received well by consumers, especially because of the high price tag. Also, the unlicensed pods that consumers have been using for so long are not compatible with this brewer.
Operating income plunged 28% to $176.3 million. Adjusted operating margin declined 560 bps to 18.2% due to lower gross margins and higher selling, general and administrative ratio.
Segment Details
Approximately 94% of third-quarter fiscal 2015 net sales came from Keurig Single-Cup Brewers, pods and Keurig-related accessories, while bagged coffee, fractional packs and the Canadian office coffee services business accounted for the rest.
Net sales of Podsslipped 1% year over year to $815.0 million as a result of negative product mix (8 pp) and unfavorable foreign currency exchange rates (1 pp).
Net sales of Brewers and Accessories slipped 26% year over year to $95.0 million due to an 18% decline in volume. Volume suffered due to difficult year-ago comparison and high inventory levels which negatively impacted shipments in the quarter.
Net sales of Other products slipped 12% to $59.6 million due to demand shift from traditional coffee package formats to single-serve pods.
Guidance for Fiscal 2015
Keurig Green Mountain revised the fiscal 2015 outlook downward to reflect the impact of lower than expected Keurig pod sales.
Keurig Green Mountain expects adjusted earnings per share to decrease in a low teens range as against a mid single-digit decline. This includes a foreign exchange headwind of 13 cents. The company expects revenues to decline in low-single to mid-single digits instead of the previous flat outlook.
Guidance for Fourth-Quarter Fiscal 2015
Keurig Green Mountain expects adjusted earnings per share in a range of 70 cents to 75 cents for fourth-quarter fiscal 2015. This compares unfavorably with Zack Consensus Estimate of 97 cents. The guidance includes a foreign exchange headwind of 3 cents. Sales are likely to decline in low teens during the quarter.
Guidance for Fiscal 2016
For fiscal 2016, Keurig Green Mountain expects the hot brewer business to deliver modest earnings per share growth from the fiscal 2015 level. The company expects plans to invest approximately $100 million in its Keurig KOLD brewer scheduled to be launched in fall 2016. For the first quarter of fiscal 2016, the specialty coffee retailer expects earnings to decline due to higher operating costs.
Other Updates
Following soft results for two consecutive quarters, Keurig Green Mountain has started a cost reduction program, under which it plans to lay off 5% of its workforce. The program aims to generate approximately $300 million in savings over the next three years with nearly $100 million to be realized in fiscal 2016.
Keurig Green Mountain further announced an additional share repurchase program of $1 billion to be completed over the next two years.
KeurigGreen Mountain has a Zacks Rank #4 (Sell).
Some better-ranked stocks in the consumer staples sector are Dr Pepper Snapple Inc. DPS, Monster Beverages Inc. MNST and Whitewave Foods Inc. WWAV. All these stocks carry a Zacks Rank #2 (Buy).
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