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Coffee maker Green Mountain Coffee Roasters Inc. (GMCR - Analyst Report) reported robust fourth quarter 2012 results. Adjusted earnings (excluding amortization identifiable intangibles expense) of 64 cents per share surpassed both the prior-year quarter earnings and the Zacks Consensus Estimate of 47 cents by 36% on the back of solid top-line growth, lower tax rate and lower interest expense.

Further, an extra week in the quarter added 7 cents. Earnings were also well ahead of the management’s guidance range of 45 to 50 cents.

Consolidated Revenues and Margins

Green Mountain’s quarterly net sales surged 33% to $946.7 million, reflecting the success of Keurig Single Cup Brewers, single serve packs (K-cups), and Keurig-related accessories. Strong sales of bagged coffee and the success of the office coffee services business also contributed to the year-over-year revenue increase.

The additional week added $90 million to the sales in the fourth quarter. Sales exceeded the Zacks Consensus Estimate of $902.0 million and also management’s expectation of 25% to 30% year-over-year growth.

Net sales of K-cup packs increased 47% year over year to $700.2 million, driven largely by volume growth, partially offset by mix and pricing headwinds. Two of the company’s several patents expired in September, 2012, which negatively impacted company’s K-cup sales, as these patents provide royalty to the company if any third party sells its K-cups.

Net sales of brewers and accessories went up 30% from the prior-year quarter to $150.1 million.

On a year-on-year basis, gross profit increased 24.5% to $316.4 million. However, gross margin contracted 230 basis points to 33.4% as lower-than-expected production levels resulted in the under-utilization of current manufacturing base. Adjusted operating margin decreased 10 basis points to 16.6%.

Fiscal 2012 Results

Green Mountain’s fiscal 2012 adjusted earnings were $2.40 per share, up 46% from $1.64 per share in the year-ago period. Fiscal 2012 earnings beat the Zacks Consensus Estimate of $2.24 per share by 7.1%. The upswing in the results was driven by robust revenue growth. The results exceeded management’s earnings expectation range of $2.21 to $2.26 per share.

Net sales surged 46% to $3.86 billion, reflecting the success of Keurig Single Cup Brewers, single serve packs, and Keurig-related accessories. Sales of bagged coffee and office coffee services business also contributed to the top line. Sales exceeded the Zacks Consensus Estimate of $3.81 billion and management’s expectation of a sales growth of 43% to 45% over fiscal 2011.


The company has refined its adjusted earnings per share outlook for fiscal 2013, but reiterated its net sales growth, capital expenditures and free cash flow estimates. Green Mountain expects its adjusted earnings in the range of $2.64 to $2.74 per share, from the prior guidance range of $2.55 to $2.65 per share.

The company expects net sales growth in the range of 15% to 20% over fiscal 2012. Capital expenditure is expected in the range of $380 million to $430 million and free cash flow in the range of $100 million to $150 million.

Green Mountain also provided its outlook for first quarter 2013. For the first quarter, the company expects adjusted earnings per share in the range of 62 cents–67 cents and sales growth in the range of 14% to 18%. The guidance incorporates company’s continuous efforts to increase brand investments and product innovations.

The Zacks Consensus Estimates for the first quarter and fiscal 2013 are pegged at 68 cents and $2.68 per share, respectively.

Our Recommendation

We provide a long-term Neutral recommendation on the stock, as we are encouraged by the company’s efforts to turnaround its business. Apart from rolling out new products, Green Mountain, which specializes in single cup brewing technology, is upgrading its Keurig brewing system to attract more customers.

Still, Green Mountain carries a Zacks #4 Rank (short term Sell rating) in the face of increasing competition from new entrants like Starbucks Corporation (SBUX - Analyst Report).

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