Green Mountain Brews Profits

Green Mountain Coffee Roasters (GMCR - Analyst Report) reported robust first-quarter 2012 results with its adjusted earnings of 60 cents per share, which surged 233% year on year from 18 cents in the prior-year quarter. The adjusted earnings also exceeded the Zacks Consensus Estimate of 36 cents per share.

The adjusted earnings exclude the acquisition-related expenses, expenses related to SEC inquiry, amortization of identifiable intangibles, and gain on sale of subsidiary. Including these one-time items, earnings soared to 66 cents per share as compared to 2 cents per share in the prior-year quarter.

The year-on-year upswing came on the back of success of Keurig Single-Cup Brewing System, supported by owned and non-owned beverage brands in K-Cup packs coupled with strong holiday sales.

In comparison with the first quarter results, Green Mountain projects second quarter 2012 adjusted earnings per share in the range of 60 cents to 65 cents and the ensuing fiscal 2012 adjusted earnings within $2.55–$2.65 per share. The Zacks Consensus Estimate for the next quarter is pegged at 74 cents and $2.57 per share for fiscal 2012.

Consolidated Revenues and Margins

Green Mountain’s quarterly net sales surged 102% to $1,158.2 million compared with $574.1 million in the prior-year period, reflecting robust sales growth in total K-Cup portion pack, Keurig brewer and beverage holiday and accessory sales. Sales exceeded the Zacks Consensus estimate of $1,062.0 million.

Almost 90% of the net sales were contributed by the Keurig brewing system and its recurring portion pack sales, including Keurig-related accessory. Rest of the sales came from bagged coffee and office coffee services business.

Green Mountain forecasts net sales growth of 45%-50% in the second quarter 2012. Additionally, the company also plans to achieve consolidated net sales growth of 60%-65% for fiscal 2012.

On a year-on-year basis, gross profit increased to $336.6 million, representing gross margin of 29.1% of net sales, compared to $143.6 million, representing 25.0% in the corresponding first quarter of 2010, spurred by price increases on K-Cup portion packs during fiscal 2011and due to a higher percentage of portion-pack related revenue in the quarter.

Quarterly operating income climbed to $145.8 million from $23.3 million in the prior-year quarter. Operating margin improved to 12.6% from 4.1% in the prior-year quarter, owing to strong gross margin as well as SG&A leverage. Adjusted margin improved to 13.6% of net sales in the first quarter of 2012 from 7.7% in the prior-year period.

Other Financial Updates

The company exited the quarter with cash and cash equivalents of $84.1 million as on December 24, 2011, up from $13.0 million on September 24, 2011.

Green Mountain expects capital expenditures in the range of $630.0 million to $700.0 million for fiscal year 2012.

Inventories hiked to $606.7 million at the end of December 24, 2011 compared to $269.1 million at the end of December 25, 2010. The year-over-year increase comprised a rise in raw materials and finished goods inventory with approximately 66% of the escalation due to K-Cup packs on hand.

Accounts receivable increased 73% due to continuous sales growth. Debt outstanding decreased to $479.7 million at the end of December 24, 2011 from $1,085.0 million at the end of December 25, 2010, as a result of paying down the long-term revolver.

On October 3, 2011, Green Mountain sold all the outstanding shares of Van Houtte USA Holdings, Inc., also known as the Van Houtte U.S. Coffee Service business or “Filterfresh” business, resulting in a gain of $26.3 million.

Our Take

The company is expected to continue to add new brands to the Keurig Single-Cup brewing system, which will help drive incremental brewer adoption, and increase system awareness.

Although Green Mountain enjoys a sound position in a prospering industry with its strategic acquisitions holding out promises, coffee’s vulnerability to highly volatile global prices and presence of tough competitors like Peet's Coffee & Tea Inc. (PEET) and Starbucks Corporation (SBUX - Analyst Report) concern us.

Currently, Green Mountain holds the Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. Over the long term, we prefer to rate the stock as Neutral.