Green Mountain Earnings: Why Starbucks and Whole Foods Matter

Green Mountain Coffee Roasters (GMCR +0.00%) will release its quarterly report on Wednesday, and investors have become increasingly nervous with the home-coffee-brewer manufacturer's prospects. Given how far shares have fallen, many clearly fear that Green Mountain earnings could suffer if the company can't pull potential competitors into line. After having successfully returned Starbucks (SBUX +0.78%) into the fold, Green Mountain could still face a threat to its long-term earnings growth from Whole Foods Market (WFM +0.00%).

Green Mountain has gone through repeated bouts of volatility in recent years. The soaring prospects for the Keurig system gave way in 2011 to concerns about accounting practices, but a favorable resolution led the stock to a big rebound. More recently, attention has turned to off-patent K-Cups, as Whole Foods has decided to sell its own unlicensed products rather than follow Starbucks' lead and enter into a marketing agreement with Green Mountain. Could Whole Foods bring down Green Mountain's home-coffee dominance? Let's take an early look at what's been happening with Green Mountain Coffee Roasters over the past quarter and what we're likely to see in its report.

Stats on Green Mountain Coffee Roasters

Source: Yahoo! Finance.

Will Green Mountain keep bringing in the green?
In recent months, analysts have become guardedly more optimistic about Green Mountain earnings, pushing their fiscal 2014 projections up by about 1%. The stock hasn't held up nearly as well, dropping 13% since mid-August.

Green Mountain's previous earnings report set the stage for a big push higher for the stock early in the quarter. Investors initially were concerned despite an 18% rise in overall revenue, in part because brewer sales dropped by 4%. Yet the company's huge run throughout much of 2013 led to Green Mountain becoming a member of the Nasdaq 100 index in late August, leading to index-fund buying and further big gains.

Since then, though, Green Mountain has lost all of its momentum. Initially, the drop seemed to come from investors exiting their index-motivated trades, with hedge-fund investor David Einhorn reiterating that he remained a short-seller of the stock. Yet in early October, Whole Foods decided to join several other grocers that already offered unlicensed K-Cups directly to customers. Investors saw that as a threat to Green Mountain's long-term business strategy, given that it derives more than three-quarters of its overall revenue from K-Cup sales.

Green Mountain has so far done an excellent job of keeping Starbucks and other potential competitors from using off-patent K-Cups to avoid paying licensing fees. As Green Mountain keeps unveiling new machines, such as the Vue and the recently released Bolt brewer for office settings, it can offer more lucrative distribution packages to give unlicensed sellers incentives to work with Green Mountain rather than against it. Moreover, with a new deal with Campbell Soup to offer instant soup from Keurig machines, Green Mountain is looking outside the box for new revenue opportunities.

Green Mountain's other recent move was to open its own dedicated Keurig Store retail location. By doing so, it hopes to mimic the success of companies that rose to fame using other entities' retail platforms but which then opened their own stores. It will also give Green Mountain a way to showcase new brewers and sell its own K-Cups at the same time.

In the Green Mountain earnings report, watch to make sure that the company stays upbeat about its prospects for drawing Whole Foods back into the fold. Ideally, if it can pull in the organic grocer's business, Green Mountain could get a whole new leg up for its share price out of the bargain.

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