Green Mountain Tops EPS, Guides Down

Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) reported robust third quarter 2012 results. Adjusted earnings (excluding amortization identifiable intangibles expense) of 52 cents per share climbed 6% from 49 cents reported in the prior-year quarter and also surpassed the Zacks Consensus Estimate of 49 cents by 6%.

The year-on-year upswing came on the back of lower coffee prices coupled with net price realization that in turn was a result of the positive pricing undertaken in the previous year.

Consolidated Revenues and Margins

Green Mountain’s quarterly net sales surged 21% to $869.2 million from $717.2 million in the prior-year period, reflecting the success of KeurigSingle Cup Brewers, single serve packs, and Keurig-related accessories. Strong sales of bagged coffee and success of office coffee services business also contributed a large deal. However, sales missed the Zacks Consensus estimate of $875.0 million.

Net sales of single-serve pack increased 31% year over year to $638.0 million, driven by the 28 percentage points increase in sales volume and 3 percentage-point increase in K-Cup pack net price realization.

Net sales of brewers and accessories went up 32% from the prior-year quarter to $139.1 million.

According to the market research firm NPD, Vue brewer sales were more than double of other coffee and espresso makers’ sales during the quarter.

On a year-on-year basis, gross profit increased to $303.3 million from $264.1 million in the year-ago quarter. Gross margin was 34.9% of net sales as against 36.8% in the third quarter of 2011. Gross margin contracted as lower-than-expected production levels led to the under-utilization of current manufacturing base.

Operating income climbed 9.3% to $144.2 million during the third quarter. Operating margin was 16.6% compared with 18.4% in the prior-year quarter.

Other Financial Updates

Exiting the quarter, Green Mountain had cash and cash equivalents of $149.1 million, compared with $146.0 million in the prior quarter.

Inventories stood at $667.0 million compared with $602.1 million in the prior quarter. Accounts receivable reduced to $265.9 million during the third quarter, from $300.7 million in the prior quarter. Debt outstanding came down to $409.1 million from $441.2 million in the prior quarter.

Guidance

Following the third-quarter results, Green Mountain lowered its guidance and now projects fourth quarter 2012 adjusted earnings per share in the range of 45 cents–50 cents. Fiscal 2012 adjusted earnings are expected between $2.21 and $2.26 per share. The Zacks Consensus Estimates for the fourth quarter and fiscal 2012 are pegged at 62 cents and $2.37 per share, respectively.

Green Mountain forecasts net sales growth of 25%-30% for the fourth quarter. Additionally, the company plans to achieve consolidated net sales growth of 43%-45% (over fiscal 2011) and expects net sales to be in the range of $3.79 billion-$3.84 billion for fiscal 2012.

Capital expenditures are expected to be within $475.0 million-$525.0 million for fiscal 2012.

Our Recommendation

Green Mountain, unlike its coffee producing peers, has diversified its business and is a complete unit of coffee making as well as brewing.

However, Green Mountain’s revenue is highly dependant on its Keurig business. The main patents on the K-Cup will end in September 2012. Well known brands and close competitors like Starbucks Corporation (SBUX - Analyst Report) and Caribou Coffee Roasters will have other alternatives, which will hurt Green Mountain’s fundamentals.

Currently, Green Mountain carries a Zacks #4 Rank (short-term Sell rating).