Green Mountain Coffee Roasters, Inc. Reports Sales Gain But Declining Gross Margin In Second Quarter

Green Mountain Coffee Roasters, Inc., a provider of specialty coffee and coffee makers, announced its second quarter fiscal year 2012 results for the 13 and 26 weeks ended March 24, 2012.

  • Net sales of $885.1 million, up 37 percent over net sales of $647.7 million in the year-ago quarter.
  • GAAP earnings per share (EPS) of $0.58 compared to second quarter fiscal year 2011 GAAP EPS of $0.44; non-GAAP EPS of $0.64 increases 33 percent over $0.48 in the year-ago quarter.
  • GAAP operating income of $149.6 million compared to second quarter fiscal year 2011. GAAP operating income of $119.6 million; non-GAAP operating income of $162.3 million improves 22 percent over the year-ago quarter.
  • GAAP net income of $93.0 million compared to second quarter fiscal year 2011 GAAP net income of $65.4 million; non-GAAP net income of $101.7 million increases 42 percent over the year-ago quarter.

"Over the past several years we achieved a strong net sales growth rate driven by consumers' rapid acceptance of our innovative Keurig® single cup brewing system," said Lawrence J. Blanford, GMCR's president and CEO in a prepared statement. "Additionally, during this timeframe we made a number of strategic acquisitions that strengthened our long-term position and contributed to our growth rate. During the second fiscal quarter our 37 percent net sales growth resulted from more consumers adopting the ease and convenience of Keurig's® Choose. Brew. Enjoy.™ approach to beverages. Despite lower-than-anticipated portion pack sales, and to a lesser degree, brewer sales, in the quarter we were able to control sales, general and administrative expenses enabling us to achieve non-GAAP earnings per share growth of 33 percent."

"Based on the consumer surveys conducted on our behalf, we estimate our U.S. Keurig® single cup brewer installed base has increased to between 10.8 and 12.2 million brewers in use in households as of March 2012, a substantial increase from where we believe our installed base was just one year ago," continued Blanford. "After several quarters of robust adoption, we now expect a more moderated growth trajectory going forward for both Keurig® brewer and K-Cup® pack sales. Based upon our estimate that our installed base represents a relatively small percentage of the total estimated 90 million U.S. households with a coffee maker, we remain enthusiastic about the long-term opportunity for continued Keurig® brewer adoption as well as initial consumer reaction to our recently introduced Vue™ brewer."

Approximately 90 percent of consolidated second quarter fiscal year 2012 net sales were from sales of Keurig® single cup brewers, single-serve packs, and Keurig®-related accessories, with the remainder of net sales consisting primarily of sales of bagged coffee and sales from the office coffee services business.

The increase in single serve pack sales was driven by a 47 percentage point increase in sales volume and a 12 percentage point increase in K-Cup® pack net price realization due to price increases implemented during fiscal 2011 to offset higher green coffee and other input costs.

The second fiscal quarter's net sales included nominal initial sales of new Vue™ brewers and Vue™ packs. Net sales of Vue™ brewers and Vue™ packs are not expected to be material in the company's 2012 fiscal year.

GMCR sold 1.4 million Keurig® Single Cup Brewers during the second quarter of fiscal year 2012. This brewer shipment number does not account for consumer returns.

The company estimates that the combination of brewer shipments from GMCR and its licensed partners resulted in shipments of 1.5 million Keurig® single cup brewers in the second quarter of fiscal year 2012.

Other products and royalties declined year-over-year primarily as a result of the sale of the Filterfresh business in October 2011.

In the second quarter of fiscal 2012, gross margin declined to 35.4 percent from 37.5 percent in the prior year period.

The decline in gross margin over the prior year quarter primarily was due to the following:

  • Approximately 290 basis points due to the combination of under-utilization of current manufacturing base as a result of lower-than-expected K-Cup® pack demand and the resulting efforts to reduce K-Cup® pack inventories which together, increased average labor and overhead costs per K-Cup® pack.
  • Approximately 170 basis points due to higher green coffee costs.
  • Approximately 150 basis points due to a higher write down of finished product and anticipated obsolescence of raw material inventory due to lower-than-anticipated sales of seasonal and certain coffee products.
  • Approximately 50 basis points increase in warranty expense over the prior year quarter which had benefited from a new program which reduced packaging materials on warranty-related brewers.

Partially offsetting the decline in gross margin compared to the prior year was an approximate 390 basis points increase due to net price realization from price increases taken in fiscal 2011 to offset higher green coffee and other input costs, and a 90 basis points benefit due to a recovery under an agreement with a supplier for certain brewer warranty indemnification.

GAAP operating margin of 16.9 percent of net sales in the second quarter of fiscal year 2012 decreased from 18.5 percent in the prior year period as a result of the lower gross margin.

Non-GAAP operating margin, which excludes $1.1 million in expenses associated with the SEC inquiry and pending litigation, as well as $11.6 million in amortization of identifiable intangibles related to the company's acquisitions, was 18.3 percent of net sales in the second quarter of fiscal year 2012 compared to 20.6 percent in the prior year period.

The company's effective income tax rate was 36.0 percent for the second quarter of fiscal year 2012 as compared to a 35.5 percent effective tax rate for the prior year period.

Diluted weighted average shares outstanding as of the end of the second quarter of fiscal year 2012 increased to 159.4 million from 147.6 million from the prior year period.

The company provided revised estimates for its fiscal year 2012:

  • Total net sales in the range of $3.8 billion to $4.0 billion, or net growth of 45 percent to 50 percent, from $2.7 billion in fiscal year 2011.
  • Fiscal year 2012 non-GAAP earnings per diluted share in a range of $2.40 to $2.50 per diluted share, excluding any acquisition-related transaction expenses; legal and accounting expenses related to the SEC inquiry and the company's pending litigation; amortization of identifiable intangibles related to the company's acquisitions; and any gain from the sale of the Filterfresh business.
  • Capital expenditures in the range of $525 million to $575 million.

The company is providing initial estimates for the third quarter of fiscal year 2012:

Net sales in the range of $861 million to $897 million or net sales growth of 20 percent to 25 percent, from $717.2 million in third quarter of fiscal year 2011.

Fully diluted non-GAAP earnings per share in the range of $0.48 to $0.53 per share excluding any acquisition-related transaction expenses; legal and accounting expenses related to the SEC inquiry and the company's pending litigation; and amortization of identifiable intangibles related to the company's acquisitions. 

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