Source: Keurig Green Mountain.
The household appliance industry might seem like a simple business, but it's littered with fad products that came into and went out of style. Coffee is a vital morning staple for millions of Americans, and Keurig Green Mountain (GMCR.DL) and its single-serve brewers revolutionized the way that people make coffee at home. Yet throughout 2015, Keurig has struggled against shifting consumer trends, and coming into Wednesday afternoon's fiscal third-quarter financial report, investors expected Keurig to post substantial earnings declines and eke out only small gains in revenue. As it turned out, Keurig couldn't even do that much, posting sharp revenue declines as well and reducing its guidance for the remainder of the fiscal year. Let's take a closer look at Keurig Green Mountain's latest results to figure out whether it can eventually turn things around.
Keurig Green Mountain brews bitter results
Keurig Green Mountain's fiscal third-quarter results didn't do much to stoke enthusiasm about the company's prospects. Revenue fell 5% to $970 million, badly missing the $1.03 billion that investors had expected to see. On the bottom line, net income plunged 24% even on an adjusted basis, and although adjusted earnings of $0.80 per share topped the consensus forecast by a penny, they were still almost 20% lower than year-ago results.
The weakness in Keurig Green Mountain sales came from all corners. Sales of pod packs eased downward by 1%, helping to cushion the blow for the coffee giant. Sales proceeds from brewers and accessories fell by more than a quarter, however, and net revenue from other products declined 12%. Within the pod segment, Keurig managed to boost both unit volume and implement price increases to help support sales, but a decline in product-mix shifts among consumers toward less profitable choices offset those gains, and foreign currency impacts pulled revenue down as well.
Keurig's hardware results continued to look ugly. Brewer sales volumes dropped 18%, with high levels of retail inventory weighing on its ability to move products through to retailers. Promotional efforts to increase volumes resulted in a price hit as well, and customers tended to choose less expensive models than in the year-ago quarter. Sales of accessories also fell sharply, down 22% from fiscal 2014's third quarter.
In terms of geography, Keurig's results were relatively uniform in constant-currency terms. U.S. sales fell 4%, while currency-neutral revenue in Canada dipped 3%, although 11 percentage points of currency headwinds sent Canadian sales down much more sharply in U.S. dollar terms. For the most part, though, Keurig didn't take a huge hit from the strong dollar, which accounted for just 1.5 percentage points of its total revenue.
CEO Brian Kelley wasn't happy about the sales declines, but he tried to look to the future. "We are taking decisive actions to adapt and compete more effectively in today's rapidly evolving, dynamic marketplace," Kelley said, and he pointed to the new Keurig K200 brewer and enhancements to the At Home brewer lineup to help boost hot-beverage sales even as the company looks forward to the launch of the Keurig Kold system.
Keurig Green Mountain cuts guidance -- again
Yet investors once again had to suffer reductions in the company's guidance for fiscal 2015. Keurig has given up expecting sales gains from last year's levels, projecting declines in the low- to mid-single-digit percentage range. Adjusted earnings will fall by a percentage in the low teens, which is much worse than the mid-single-digit decline it projected just last quarter.
For the fiscal fourth quarter, Keurig also shocked investors. Revenue could decline by double-digit percentages, and adjusted earnings of $0.70 to $0.75 per share would be far below the $0.97 per share that investors expected from Keurig. Early guidance for fiscal 2016 suggests further headwinds, as Keurig thinks that adjusted earnings will decline in the first quarter as adverse coffee prices and ramp-up costs for its new systems weigh on profits.
In response to these pressures, Keurig announced a couple of new initiatives. First, it said it would buy back $1 billion of its stock in an attempt to accelerate its capital return to shareholders. Also, it adopted cost-cutting measures to enhance productivity, which will result in a workforce reduction of about 5% to produce roughly $100 million in savings next year.
Shares of Keurig were halted for the first half-hour following the announcement, but thereafter, the stock quickly crashed 25% lower in the opening minutes of after-market trading. In the long run, Keurig can implement efficiency efforts, but it can't fully recover without making itself an essential part of American households again, and the company could face an uphill battle reestablishing itself as a key player in the coffee industry. It really needs success from Keurig Kold in the year ahead in order to get back some of its lost momentum.
