Investors pushed shares of Green Mountain Coffee Roasters (GMCR.DL) higher by as much as 17% at the open today after the company delivered better-than-expected fourth-quarter and full-year earnings on Wednesday. It was a monster quarter for the specialty coffee retailer. Adjusted earnings climbed 56% to $0.89 per share in the fourth quarter, which was above analyst expectations for $0.75 a share. Revenue also impressed, coming in at $1 billion in the quarter, up 22% from the year-ago period.
For fiscal 2013, Green Mountain posted adjusted EPS of $3.39, on revenue of $4.4 billion for the year. Unfortunately, things turned bitter when the company forecast revenue growth in the low-to-mid single digits for its current quarter. This new outlook calls for adjusted earnings of $0.85 to $0.90 for its first quarter of fiscal 2014. Even at the high end of its guidance, that's still $0.06 short of analysts' expectations for $0.96 a share.
As Green Mountain faces slowing growth in the year ahead, let's take a closer look at one telling tidbit from the company's earnings call last night.
Why future product innovation might not be enough
Looking to 2014, Investors will want to keep an eye on important product transitions. The first of these will include Green Mountain's new lineup of hot system brewers. Green Mountain, which is known for its Keurig brewing system, will also roll out new portion packs specifically designed for use in its next-generation 2.0 machines.
The specialty coffee retailer says its upgraded portion packs will include "an interactive readability that will deliver the full extent of the breakthrough consumer benefits coming" with the new brewers.
However, that's a lot of colorful wording about a product (portion packs) that anyone can make and sell these days. If you remember, Green Mountain lost two key patents last year that protected its popular K-Cups technology from competitors. Unfortunately, without the patent protection, rivals including Starbucks and various grocery store chains have entered the market with their own single-serve pods.
With companies such as Whole Foods (WFM) now selling their own private-label pods for use in the Keurig System, Green Mountain's market share is quickly deteriorating. On the conference call, the company said it has learned from these past mistakes and is doing things differently with its upcoming Keurig 2.0 platform. Specifically, the new system will not brew unlicensed packs. Now let's think about this for a moment. If I own one of Green Mountain's older machines that can brew a variety of pods, why would I buy the new version that will only work with Green Mountain licensed packs? It seems Green Mountain is making a big bet on the likelihood that consumers will purchase and use its new 2.0 system.
Nevertheless, the company reassured analysts on the call saying that it is "actively engaged in discussions with a large number of unlicensed players to welcome them into the system." To be fair, Green Mountain has forged strategic relationships with some important brands so far including Starbucks. Earlier this year, the world's biggest coffee retailer agreed to a five-year extension of its previous partnership with Green Mountain.
However, this could be a harder sell for other names in the space. After all, why would a company such as Whole Foods agree to pay royalties to Green Mountain on pods that it already makes and sells on its own? In fact, "Whole Foods Market did not even consider Green Mountain Coffee as a supplier" for these pods, according to USA Today. Moreover, other companies might choose to follow Whole Foods' lead.
A smarter way to perk up your portfolio
Green Mountain shareholders should be cautious here, as the company's best days may now be behind it. On the recent conference call, investors learned that Green Mountain will roll out an updated product line and that it hopes to strong arm rivals into new licensing agreements. Yet, even with these developments on the horizon, the longer-term growth story is still eroding.
