Green Mountain Coffee Roasters (Nasdaq: GMCR ) is a specialty coffee producer and seller that's perhaps best known for bringing coffee lovers the convenience of the Keurig single-brew coffee system and K-Cups (individual coffee servings designed for the Keurig coffee system).
Today, let's look at three things investors should be watching regarding Green Mountain Coffee Roasters, as they'll provide us better insight into the company.
1. Inventory levels
Possibly the biggest gripe Wall Street analysts and investors have had with Green Mountain is its reckless levels of spending on new inventory despite not truly understanding the proper level of demand from its customers. That doesn't mean Green Mountain hasn't grown its business, because net sales screamed higher by 37% in its latest quarter over the prior year. But what's concerning is that expenses have been rapidly rising and inventory levels have grown in five of the past seven quarters.
Poor inventory management will negatively affect Green Mountain's margins (as it will profit less from each dollar taken in), and it shows poor forecasting and understanding of the underlying coffee demand and trends. This is somewhat similar to what happened to Krispy Kreme Doughnuts (NYSE: KKD ) in the mid-2000s, when it hugely overestimated the market demand for its doughnuts and leveraged itself to the brim to expand its chain. The move ultimately backfired, and Krispy Kreme has been attempting to recover for the better part of a decade. There's no telling whether that could happen to Green Mountain just yet, but the similarities are there if inventory levels aren't dealt with.
2. What's the competition doing?
Unlike health care, where new and innovate technologies and medicines can cause one company to leapfrog another, the coffee sector is pretty straightforward. That doesn't mean Green Mountain isn't introducing new blends of coffee or trying to better its Keurig single-brew system, but it does mean that keeping an eye on what its competition is up to is pretty easy.
One factor to keep an eye on is the partnerships Green Mountain has set up with the nation's largest coffee chain, Starbucks (Nasdaq: SBUX ) , and the second-largest chain, Dunkin' Brands (Nasdaq: DNKN ) . Starbucks earlier this year announced an expansion of its partnership with Green Mountain to distribute its personally branded Vue packs through Green Mountain's new Vue single-brew system. However, it should be noted that Starbucks also introduced plans to craft its own single-serve brewing system, the Verismo, later this year, and sales of the Verismo could eat into Keurig's dominant market share. Dunkin' Brands also expanded its partnership with Green Mountain to offer a greater selection of K-Cups in its Dunkin' Donuts restaurants.
It's also worth mentioning that of the 37 patents that Green Mountain owns, two very key patents regarding its K-Cups are set to expire in September, which could quickly expose the company to added competition.
3. Coffee prices
I know what you're thinking: "Duh!" It should go without saying that as a shareholder of any coffee company, you should be closely monitoring coffee prices, but everyone could use the reminder every once in a while -- even corporate executives.
Coffee Holdings (AMEX: JVA), the coffee roaster that took the market by storm last year, reported a dismal loss in its latest quarterly report, which it blamed on lower coffee prices and customer deferrals on orders on the expectation that prices would head even lower. Not surprisingly, Green Mountain is Coffee Holdings' largest customer.
Since last September, coffee prices have fallen from roughly $2.90 per pound to as low as $1.50 per pound within the past two weeks. Although this could eventually be a bullish sign for consumers who purchase coffee for home consumption and should release inflationary pressures from coffee chains like Starbucks and Dunkin' Brands, it could be bad news for roasters and put further pressure on Green Mountain's margins. Let's remember, because of its large inventory it's likely that Green Mountain's purchases came at much higher prices. Monitoring coffee prices once again relates to understanding consumer trends and demand, which is a crucial factor in Green Mountain's success.
Now that you know what to watch for, it should be easier to analyze Green Mountain Coffee Roasters' successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.
If you're still craving even more info on Green Mountain Coffee Roasters, I would recommend adding the stock to your free and personalized Watchlist so you can keep up on all of the latest news with the company.
Green Mountain Coffee Roasters may not be the perfect model of success, but our team of analysts at Stock Advisor think they've a found a very successful emulator of Costco in Latin America. Get your copy of this latest report and find out the identity of this game-changing stock for free!