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Why Shares of Keurig Green Mountain Inc. Crashed in August

By Timothy Green - Sep 2, 2015 at 7:01PM

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Weak guidance and news of layoffs caused confidence in the coffee company to disappear.

What: Shares of Keurig Green Mountain (GMCR.DL) crashed in August, declining by 24.6%, according to S&P Capital IQ data. A mixed earnings report, lackluster guidance, and news of layoffs sent investors fleeing.

So what: Keurig's revenue declined by 5% year over year during the third quarter, missing analyst estimates by a wide margin. Sales of Keurig's brewers and accessories collapsed, falling by 26% year over year, while sales of its pods posted a 1% year-over-year decline.

Keurig reported non-GAAP EPS of $0.80, a penny better than analysts were expecting, but profitability declined substantially year over year. On a GAAP basis, operating income fell by 30% year over year, with a big drop in the company's gross margin driving the decline.

Going forward, Keurig doesn't expect things to get much better any time soon. For the full year, sales are expected to decline in the low-single to mid-single digits, with non-GAAP EPS expected to decline by a low-teens percentage. For fiscal year 2016, Keurig expects non-GAAP earnings per share to grow modestly, driven by cost cuts as well as share buybacks. Guidance for revenue wasn't given by the company.

Now what: With layoffs expected to reduce the company's workforce by about 5%, confidence in a timely turnaround for Keurig evaporated in August. The company's brand has been tarnished by its decision to lock out third-party K-cups from its Keurig 2.0 machines, a mistake that the company has since acknowledged, and the upcoming launch of its expensive cold beverage machine has the potential to be a flop.

With Keurig's patents related to K-cups expiring in 2012, Keurig's only real advantage over the competition is its brand. That brand has taken a big hit, and without much of a plan beyond cost cutting and share buybacks, investors sent the stock tumbling in August.

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