Green Mountain Coffee Roasters Up on High Demand and High Inventory
Shares of Green Mountain Coffee Roasters (NASDAQ: GMCR) traded up on Thursday after reporting second-quarter earnings. The coffee maker has struggled in 2012 due to weak sales reports and high inventories early in the year. In early May, the company saw its share price cut in half after reporting weak sales and cutting its outlook. The company beat analyst estimates on earnings but missed on revenues. The company cut its outlook for it's near term earnings but is still trading up sharply.
Second-quarter revenue was $869.2 million, up 21 percent from $717.2 in the same period last year. The company reported earnings of $0.52 per share, compared to $0.46 per share in the same period last year. Analysts average estimate revenues of $873.3 million and earnings of $0.52 per share. The company also adjusted its guidance for full year earnings to $2.21 to $2.26 per share, below expectations of $2.35. The company also saw a year-over-year increase of 60 percent in inventories.
Lawrence J. Blanford, Green Mountain's President and CEO commented, "Our third quarter results demonstrate continued business strength and solid fundamentals, particularly in light of the robust comparable quarter we reported in the year ago period. Our Keurig Single Cup Brewing system continues to revolutionize the way North Americans prepare and consume their single-serve beverages and our proven ability to grow consumer awareness and demand for the system has enabled us to deliver extraordinary results over the past five years."
If Green Mountain Coffee Roasters missed on revenues and lowered its guidance, why did its shares trade up 30 percent on Wednesday? One reason could be due to the company's higher inventory that is driven by the high demand for its products in the holiday season. Investors may see this increase in demand as an investment opportunity.
If demand doesn't match the inventory increase it could prove to be dangerous for the coffee brewer. In May, inventory growth outpaced sales and the company saw its shares plunge. If the sales miss forecasts again, the company could see a similar situation to earlier this year.
Frances G. Rathke, Green Mountain's Chief Financial Officer commented, “Our higher overall inventory dollar balance in the third quarter of fiscal 2012 compared to the same period in fiscal 2011 is largely driven by increases in Keurig brewer finished goods resulting from expected first quarter fiscal 2013 holiday demand. In order to ensure brewer availability on retail shelves for the holiday season, all of our anticipated holiday brewer units must be on hand in North America by early October, leading to brewer and accessories inventory build beginning in our fiscal third quarter and continuing into our fiscal fourth quarter."
Green Mountain also makes single cup brewing systems and single cup capsules that make up a majority of its sales. The single serve packs saw an increase in sales of 31 percent. This increase could be from the growing popularity of single cup brewers in the US. Blanford noted that demand for the company's single brewing systems is increasing and he sees future growth in the area.
One company that could prove to be a competitor to Green Mountain is Starbucks (NASDAQ: SBUX). Starbucks also makes single cup packages that can be used in Green Mountain's single cup brewers. In the third quarter, Starbucks made its single brewing packets available in retail stores in the US. Starbucks is a much bigger company, having a market capitalization of $33.08 billion, compared to Green Mountain market capitalization of $3.55 billion. Starbucks is relatively new in the single cup brewing market and could have potential to expand this segment.
Green Mountain shares sunk in early May, but if demand matches the large amount of inventory, the company could see its shares recover. It will be important to keep an eye on Green Mountain during the holiday season when they expect sales to be high.
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