GMCR REALITY BITING

Green Mountain Coffee Roasters’ 1QFY13 earnings beat expectations but guidance and current trends continue to suggest a more competitive market place.

 

Green Mountain Coffee Roasters reported 1QFY13 EPS of $0.76, 9 cents ahead of the high-end of guidance, driven primarily by better gross margins.  Favorable green coffee costs, lower warranty expense, and lower sales returns accounted for +250 bps, +130 bps, and +100 bps, respectively. 

 

 

Outlook

 

The company’s guidance for FY13 is resetting the investment community’s expectations this morning as management guided below consensus.  Embedded in the company’s outlook is a forecast for brewer shipments to decline slightly in 2QFY13, while POS will continue to grow.  The company struck a cautious tone when discussing the growth outlook for the overall coffee and espresso maker category.  The increase in FY13 guidance seems entirely attributable to the 1Q beat with the outlook for the year remaining unchanged.

 

 

Demand

 

Consumer demand for K-Cups is an important component of the GMCR story.  Sales trends seem to be slightly weaker than what the Street has been expecting.  The new revenue guidance implies 2QFY13 K-Cup sales growth roughly in line with 1QFY13 levels despite a growing installed base.  Our concern is that attachment rates going forward as it seems that management has “stuffed the channel” recently and is betting that K-Cup sales pick up.  Management’s commentary on the inventory within the distribution channel was less-than-convincing.  We believe that management would have guided higher for revenues over the remainder of FY13 if there was true visibility on K-Cup sales going forward. 

 

 

Competitive Pressures Mounting

 

Some recent press items have stated that the competitive pressures on Green Mountain have been less-than-expected following the expiration of the company’s K-Cup patent.  Whatever expectations have been, the numbers have been less than encouraging.  1QFY13 POS volume growth was 26% while revenue from single serve packs grew 21%.  This negative price/mix number of -5% is an acceleration from the -3% price/mix figure of 4QFY12. 

 

 

New CEO Impressed

 

The new CEO, Brian Kelly, gave a good account of himself and the strength of his background in consumer products was apparent for all to hear.  He is only a couple of months into his new role so more time will be required to gauge his ability to right the GMCR ship.

 

 

Investigation and Litigation

 

There are several class action lawsuits ongoing and the SEC investigation into Green Mountain is yet to conclude.  Mentions of these issues were conspicuous in their absence from management commentary.  We believe there is some event risk as the company will be responding to litigation in late February and early March.

 

 

Howard Penney

Managing Director

 

Rory Green

Senior Analyst


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