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Specialty coffee retailer Keurig Green Mountain Inc. (GMCR - Analyst Report), delivered robust second-quarter 2014 adjusted earnings of $1.08 per share which beat the Zacks Consensus Estimate of 95 cents by 13.7% and surpassed the company’s guidance of 93–98 cents.

Earnings also surpassed the year-ago quarter results by 16%. Adjusted earnings excluded amortization charges of 5 cents. Profit was on the upswing on the back of solid top-line improvement and enhanced operational efficiencies.

Consolidated Revenues and Margins

Keurig Green Mountain’s quarterly net sales rose 10.0% to $1.1 billion from $1.0 billion in the comparable prior-year quarter, backed by 8% growth in the sales of K-cups and Vue packs. Net sales also beat the Zacks Consensus Estimate of $1.04 billion by 5.7%

Keurig Green Mountain’s quarterly net sales rose 10.0% to $1.1 billion from $1.0 billion in the comparable prior-year quarter, driven by strong brewer and portion pack sales.

Approximately 94% of fourth-quarter fiscal 2013 net sales was contributed by 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 13.0% year over year to $898.2 million due to a substantial 15 percentage point (pp) increase in volume, partially offset by mix and pricing headwinds.

Net sales of Brewers and Accessories increased 9.0% from the comparable prior-year quarter to $137.6 million mainly driven by 29 pp increase in brewer sales volume. Volume growth was partially offset by an 18 pp dip due to unfavorable pricing and product mix.

Net sales of Other products slipped 20% to $67.3 million due to a demand shift from traditional coffee package formats to single-serve packs, mainly in Canada.

Gross profit went up 10.2% to $457.4 million backed by higher revenues. Gross margin inflated 20 basis points (bps) to 41.5% due to favorable green coffee costs.

Adjusted operating income went up 21% to $271.8 million. Adjusted operating margin inflated 230 bps to 24.6% backed by favorable green coffee costs and positive pricing, top-line growth and cost control

Extension of Partnership with JM Smucker

Along with the second-quarter earnings conference call, Keurig Green Mountain announced distribution partnership with consumer food company The J. M. Smucker Company (SJM - Analyst Report). The new deal is an expansion of an agreement signed in 2010 for marketing, manufacturing and selling Smucker brands in GMCR’s K-cups.

Other Financial Details

During the quarter, Keurig Green Mountain issued 16.7 million shares as part of The Coca-Cola Company (KO - Analyst Report) transaction. On Feb 27, 2014, the company closed a previously announced deal with beverage giant, Coca Cola. Per the deal, Coca Cola took over 10% stake of the coffee maker for $1.25 billion at $74.98 per share.

In early February, the Keurig owner announced an agreement with Coca Cola as part of its strategy to step into the world of cold beverage and soda. Under the 10-year deal, the former will exclusively make Coca-Cola branded pods for use on its upcoming Keurig Cold at-home beverage system. The two companies will also work on the development and launch of this latest version of Keurig single-cup brewer.

Keurig Green Mountain also entered into a $700 million accelerated stock repurchase agreement during the quarter. The company bought back more than 4.3 million common shares during the quarter under the program. In addition, Keurig Green Mountain repurchased 15.4 million shares at a total cost of $936 million during the period.

Guidance for Fiscal 2014

The company lowered its adjusted earnings per share guidance to a range of $3.63–$3.73 from $3.75–$3.85. Lowered earnings guidance reflects additional investment behind the launch of Keurig 2.0 brewers and subsequent transition of other models to Keurig 2.0 system. Sales expectations were maintained at high single-digit range from prior year levels. Free cash flow is estimated in the range of $250–$350 million.

Guidance for Q3 Fiscal 2014

Green Mountain also provided its outlook for third-quarter 2014. The company expects adjusted earnings per share in the range of 83–88 cents and sales growth in the range of high 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 earnings growth in the mid-teens over the long term.

The Zacks Consensus Estimate for third-quarter and fiscal 2014 earnings are pegged at 89 cents and $3.74 per share, respectively.

Other Stocks to Consider

Keurig Green Mountain currently carries a Zacks Rank #3 (Hold). Another consumer staples stock worth considering is Mondelez International Inc. (MDLZ - Analyst Report), carrying a Zacks Rank #2 (Buy).

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