Image: Keurig Green Mountain.
Investors in Keurig Green Mountain (GMCR.DL) have suffered serious declines lately amid concerns about its sales of its hot-beverage brewers and the prospects for its new cold-beverage systems. Coming into Wednesday's fiscal fourth-quarter financial report, expectations for Keurig weren't terribly high, and that put the stock in a great position to soar higher after Keurig's results turned out to be much better than many had feared. Let's look more closely at how Keurig Green Mountain did during the latest quarter and what it says about its future prospects for fiscal 2016 and beyond.
Keurig Green Mountain brews up some great results
Keurig Green Mountain's fiscal fourth-quarter financials turned out to be better than most had expected, although they were still fairly ugly compared to how it did last year. Revenue of $1.04 billion was down 13% from the year-ago quarter, but that was still above the $1.03 billion consensus figure among those following the stock. Adjusted net income fell at an even more precipitous 15% pace to $131.3 million, but the resulting adjusted earnings of $0.85 per share was $0.14 higher than what most investors had expected to see from Keurig.
Looking more closely at Keurig Green Mountain's results, sales of all of its product lines were down. Pod sales were down 9%, with an unfavorable product mix accounting for most of the decline and a 4% drop in sales volumes also weighing on the segment's top-line results. Revenue from brewers and accessories plunged by nearly a third, as the company sold 20% fewer brewers than it did a year ago, and a shift toward lower-cost products cost Keurig another 10%. Other product sales fell 20%, and Keurig blamed the strong U.S. dollar and its internal decision to focus more on its pod business for the segment decline.
Keurig also took a huge hit to gross margins, with adjusted figures falling three full percentage points to 34.7%. Unfavorable moves in coffee costs were a major downward weight on margins, and the overall shift toward pod sales was largely offset by the mix of specific pods that customers chose to buy. Even the company's 20% drop in overhead expenses wasn't enough to help the bottom line much, even though Keurig succeeded in cutting marketing and labor expenses substantially.
CEO Brian Kelley celebrated Keurig's efforts. "I'm particularly pleased with the benefits realized from our cost reduction efforts," Kelley said, "as well as our strong cash generation." The CEO noted that the company expects challenging market conditions to persist, but Keurig is enthusiastic about the holiday season.
Will Keurig Green Mountain deliver on holiday promises?
In particular, Kelley sees two different initiatives that Keurig must work toward in order to produce success. First, Keurig is looking to restore confidence in its hot-beverage equipment systems in order to reassure investors that it hasn't lost focus on what has been its core business since its inception. In addition, though, Keurig will continue rolling out its Kold system, taking advantage of its partnership with Coca-Cola (KO 2.14%) to drive growth in that untapped market.
Keurig also signaled its confidence in its future by giving investors a huge dividend boost. The company hiked its payout by 13% and will now pay $0.325 per share quarterly. With the stock having fallen so dramatically, that payout now equates to a yield of more than 3% based on Wednesday's closing price. In combination with having spent $115 million to repurchase nearly 2 million shares during the quarter, Keurig hasn't hesitated to return capital to shareholders.
Still, Keurig's guidance for fiscal 2016 was far from rosy. The company set expectations for flat to low-single-digit percentage increases in sales, with the strong dollar expected to cost the company about 1% in lost sales growth. With investors expecting a 4% increase in fiscal 2016 sales, Keurig's figures weren't terribly encouraging. Adjusted earnings guidance for $3.25 to $3.45 per share was similarly weak compared to the $3.47 consensus estimate among investors.
Nevertheless, Keurig shares soared higher from the moment of the release, rising 20% in the first hour of after-market trading following the announcement. With so much negativity, even the hint of a positive holiday season was enough to give investors some relief. Nevertheless, Keurig will need to make good on its potential in order to make these share-price gains last into the future.
