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Keurig Tops Q4 Earnings, Sales; Falls Y/Y on Currency Impact

Keurig Green Mountain Inc.GMCR shares soared more than 19% in after-market trading on Nov 18, after it announced better-than-expected fourth-quarter fiscal 2015 results.

Adjusted earnings of 85 cents per share beat the Zacks Consensus Estimate of 70 cents by 21.4%, but plunged 10% year over year. Soft revenues, weak margins and currency headwinds dented profit during the quarter and offset the benefit from a lower share base and a lower effective tax rate. The figure, however, exceeded the guidance range of 70 cents to 75 cents.

Keurig Green Mountain Inc. (GMCR) - Earnings Surprise | FindTheCompany

Consolidated Revenues and Margins

Keurig Green Mountain's quarterly net sales decreased 13% year over year to $1.04 billion as a strong dollar weighed on sales of its brewing machines. Sales of pods as well as brewers and accessories declined significantly in the quarter. Sale from other products and royalties also declined. Foreign exchange negatively impacted sales by approximately 2%. Sales declined 11% on a constant currency basis. Net sales however beat the Zacks Consensus Estimate of $1.03 billion by 1.2%. Management had expected revenue decline in low teens.

Volumes and brewer mix reduced sales due to the lower price of K200 model and greater unit sales of the MINI brewer. We note that the company introduced the K200 entry level 2.0 Reservoir Brewer model in the second half of 2015. The company expects stronger shipments on the MINI in 2016, and expects both MINI and K200 to impact mix.

Adjusted gross profit declined 20% year over year to $359.3 million due to lower revenues and higher cost of sales. Adjusted gross margin shrank 300 basis points (bps) to 34.7% of net sales, due to unfavorable green coffee costs, unfavorable mix, and currency headwinds. Obsolescence charge related to BOLT brewer had a negative impact of $8.6 million on margins during the quarter. The company expects to see a slight benefit from lower coffee costs in 2016 compared to 2015.

Adjusted selling, general and administrative (SG&A) expenses decreased 20%, while SG&A ratio declined 120 basis points to 15.7% in the quarter, primarily driven by a decline in marketing expense and compensation expense.

Despite lower SG&A ratio, adjusted operating income plunged 21% to $197 million. Adjusted operating margin declined 170 bps to 19.0% due to lower gross margins.

Segment Details

Net sales of Pods slipped 9% year over year to $861.2 million as a 6% decline in product mix, 4% decline in volumes and unfavorable foreign currency exchange impact of 2% more than offset the 2% gain from pricing.

Net sales of Brewers and Accessories fell significantly by 32% year over year to $123.6 million mainly due to a 20% decline in volume and a 10% decline in product mix. A decline in pricing and foreign currency headwinds also impacted sales of the segment.

Net sales of Other products plummeted 20% to $52.2 million due to the unfavorable impact of foreign exchange rates, the loss of a customer in the away from home channel and the decision to reallocate resources from traditional coffee package formats to single-serve pods.

Fiscal 2015 Results

In fiscal 2015, adjusted earnings were $3.56 per share, which beat the Zacks Consensus Estimate of $3.43 by 3.8%, but plunged 10% year over year. Soft revenues and weak margins dented profit during the year. The rate of decline matched management's expected range of a decrease in a low teens range.

Keurig Green Mountain's fiscal 2015 sales decreased 4% year over year to $4.52 billion due to a decline in the sales of pods as well as brewers and accessories. Sales from other products and royalties also declined in the year. Management had expected revenue to decline in low-single to mid-single digits. Foreign exchange negatively impacted sales by approximately 1%. Net sales however beat the Zacks Consensus Estimate of $4.50 billion by 0.4%.

Other Updates

During the quarter, the company had repurchased 1.99 million shares for approximately $115 million. At the end of Nov 18, 2015, the company has $914 million remaining on its share repurchase authorization.

The company's board has also announced a 13% increase in its annualized dividend to $1.30 per share from $1.15. The increase will take effect with the Feb 16, 2016 quarterly dividend payment of 32.5 cents, which will be payable to shareholders as of Jan 15, 2016.

During the third quarter, Keurig Green Mountain 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.

Guidance for Fiscal 2016

Keurig Green Mountain expects adjusted earnings per share in the range of $3.25 to $3.45 per share. This includes a foreign exchange headwind of 16 cents. The company expects currency neutral revenue growth of flat to low single digits for fiscal 2016.

Overall, we are encouraged by the benefits realized from the cost reduction efforts as well as the company's strong cash generation measures. While the macroeconomic conditions will remain challenging in the near term, we remain positive on the stock owing to its strong product lineup.

Keurig Green Mountain carries a Zacks Rank #4 (Sell).

Stocks to Consider

Better-ranked beverage retailers include Primo Water Corporation PRMW , Dr. Pepper Snapple Group, Inc. DPS and The WhiteWave Foods Company WWAV . While Primo Water sports a Zacks Rank #1 (Strong Buy), Dr. Pepper Snapple and WhiteWave hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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