August 4, 2012
Maker of Keurig single-serve coffee machines Green Mountain Coffee Roasters (GMCR) reported slightly stronger than expected earnings after the market close on Wednesday, but the company’s problems are compounding. The firm earned $0.52 per share during its fiscal year 2012 third quarter, an increase of only 6% year-over-year (compared to 33% growth in Q2), though it was slightly higher than consensus estimates. Revenue grew 21% to $869 million, which was essentially equal to the Street’s estimate, but down from the 37% growth rate the firm achieved in its second quarter. Single-serve cup sales increased 31% year-over-year to $638 million, driven by 28% volume growth and a 3% price increase.
More troubling was the firm’s guidance, which was weak for not only the rest of fiscal year 2012, but also for fiscal year 2013. The firm cut its fiscal year 2012 revenue guidance range to $3.79-$3.84 billion (was $3.8-4.0 billion) and cut its earnings per share guidance range to $2.21-$2.26 (was $2.40-$2.50). The firm forecasts 15-20% revenue growth during fiscal year 2013 and earnings per share of $2.55-$2.65. Of course, this is based on “adjusted earnings per share” which exclude any one-time charges that Green Mountain will be taking in coming periods.
Interestingly, the firm booked $2.99 million in charges related to an SEC inquiry during its third quarter, up from $0.7 million last year. We think this is one of the biggest red flags because the depth of the investigation is unknown. We wouldn’t be shocked if this is related to some of the inventory and accounting issues hedge fund manager David Einhorn brought to light recently. Inventories grew 60% year-over-year during the quarter despite slowing growth.
The firm also announced it is likely to have negative free cash flow during fiscal year 2012 but generate $100-$150 million in free cash flow during fiscal year 2013. Somehow the firm also authorized a $500 million share buy-back program, which will be difficult to implement without much cash, in our view. Green Mountain also stated that it intends to spend $380-$430 million on capital investment in fiscal year 2013. If substantial cash flow generation fails to materialize, either Green Mountain will have to suspend its buy-back program or its balance sheet will become incredibly stretched, leading to the issuance of additional debt or equity (the latter likely at depressed prices).
Ultimately, we’re not big fans of the K-Cup maker, especially given the combination of slowing growth and concerns about what the SEC is inquiring about. Green Mountain’s capital allocation plan also seems questionable given the lack of cash on its balance sheet and concerns about the firm’s ability to generate cash flow in the future. We think shares are currently fairly valued at this time. The company scores a 4 on our Valuentum Buying Index (our stock-selection methodology), which suggests we’re not very constructive on its technical or fundamental profile at this time.