Specialty coffee retailer Keurig Green Mountain Inc. GMCR, delivered robust third-quarter 2014 adjusted earnings of 99 cents per share which comfortably beat the Zacks Consensus Estimate of 87 cents by 13.8% and was at the higher end of the company's guidance range of 83–88 cents.
Earnings also surpassed the year-ago quarter results by 21%. Adjusted earnings excluded amortization charges of 4 cents.
Profit was on the upswing on the back of solid top-line improvement and enhanced operational efficiencies.
Consolidated Revenues and Margins
KeurigGreen Mountain's quarterly net sales rose 6% to $1.02 billion from $967.1 million in the comparable prior-year quarter, backed by 10% growth in portion packs - K-cups and Vue packs sales. However, foreign exchange had a 1% negative impact on sales. Net sales, however, missed the Zacks Consensus Estimate of $1.04 billion by 1.9%
Approximately 81% of third-quarter fiscal 2014 net sales was contributed by Keurig Single Cup Brewers, portion packs and Keurig-related accessories, with the remainder coming from bagged coffee, fractional packs and the Canadian office coffee services business.
Net sales of Single Serve Packs increased 10% year over year to $826.3 million due to a substantial 15 percentage point (pp) increase in volume, partially offset by mix and pricing headwinds. Prices of portion pack sales in the third quarter were negatively affected by sale of more portion packs to brand owners at lower prices than the previous year.
Net sales of Brewers and Accessories slipped 4% from the comparable prior-year quarter to $128.0 million mainly due to 21 pp unfavorable pricing. Volume increased 13 pp and product mix improved 3 pp during the quarter.
Net sales of Other products slipped 17% to $68.1 million due to a demand shift from traditional coffee package formats to single-serve packs.
While domestic sales went up 7% year over year, Keurig Green Mountain's Canadian business went up 5% on a local currency basis.
Despite cost of sales rising 3.3% during the quarter, gross profit went up 9.1% to $444.6 million backed by higher revenues. Gross margin inflated 140 basis points (bps) to 43.5% due to favorable green coffee costs.
Adjusted operating income went up 18% to $243.2 million. Adjusted operating margin inflated 250 bps to 23.8% backed by favorable green coffee costs, top-line growth and cost control.
Other Financial Details
During the quarter, Keurig Green Mountain spent $117 million to repurchase a total of 1.1 million shares. Under the $700 million accelerated stock repurchase agreement during the reported quarter, Keurig Green Mountain has spent $1.1 billion and bought back 16.5 million shares as of the end of third quarter.
In addition, Keurig Green Mountain repurchased 21 million shares for $25 million during the period.
Guidance for Q4 Fiscal 2014
KeurigGreen Mountain also provided the fourth-quarter 2014 outlook. The company expects adjusted earnings per share in the range of 68–75 cents and sales to grow in the range of high single-digit to low double-digit year over year.
KeurigGreen Mountain aims to achieve double-digit growth in annual revenues and earnings growth in the mid-teens over the long term.
Guidance for Fiscal 2014
Keurig Green Mountain raised its adjusted earnings per share guidance to a range of $3.71–$3.78 from $3.63–$3.73. Higher earnings expectation reflects benefits from several strategic agreements with well-known brands to distribute their drinks in Keurig Green Mountain's portion packs. The company continues to expect that sales will grow in the high single-digit range year over year. Free cash flow is estimated in the range of $300 to $350 million, up from prior estimate of $250 to $350 million.
Other Stocks to Consider
KeurigGreen Mountain currently carries a Zacks Rank #3 (Hold). Other consumer staples stocks worth considering are PepsiCo Inc. PEP, The WhiteWave Foods Company WWAV and Dr. Pepper Snapple DPS. All carrying a Zacks Rank #2 (Buy).
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