Keurig Green Mountain Is Racing Ahead, Despite Higher Coffee Costs

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Jan 07, 2015

Shares of Keurig Green Mountain (GMCR, Financial) have registered a growth of 80% since the beginning of the year. It is one of those specialty coffee businesses that changed the coffee preparation process at home. Keurig's at-home coffeemaker resonated with the customers and became very popular. This enabled the company to register blockbuster performance in each quarter.

The company reported its fourth-quarter results this month, which beat the Street's estimates. The numbers were impressive, making investors happy and enabling the share prices to rise further. Let's take a look.

The impressive numbers

Total revenue for the quarter jumped 14% to $1.19 billion, over last year. This was higher than the analysts' estimate of $1.16 billion. The growth was driven by a 22% increase in sales of K-cups and Vue packs, the most popular products of the company. The idea of the single-serve coffeemaker was introduced by this company and now it makes the most of the retailer's revenue. Almost 84% of total revenue came from single cup brewers and Keurig related products. Thus, coffee business makes a small portion of the top line. However, certain factors such as unfavorable currency movement affected revenue by 17%. Also, the increase in coffee costs was a point of concern.

The gross margin of the company expanded by 160 basis points, clocking in at 37.6%. Earnings were also up 1% to $0.90 per share. This was much higher than the estimate of $0.78 per share. Thus, retailer managed to register an impressive bottom line.

Segmentation

The single serve pack segment surged 22% to $949 million, driven by a 28% increase in volumes. Volumes increased since the company sold its portion packs at a lower price to its brand owners.

The brewers and accessories segment was down 5% as models of Keurig 1.0 MINI Plus brewers were returned by the customers. However, volumes did increase by 13% during the quarter.

The other products segment also dropped 17%, over last year. This was mainly due to a shift in customers' preference to single serve coffee packs than having traditional coffee. This shift resulted in higher single serve sales but lower coffee sales.

Some positive factors

Recently, Keurig Green Mountain entered into a deal with Coca-Cola (KO, Financial). This partnership deal entails that the coffee maker will make a beverage making machine similar to that of coffee. Also, Coca Cola purchases a stake of 16% in the company.

Also, the coffee maker plans to introduce Keurig Cold by next year. This new introduction will compete with peer SodaStream's (SODA, Financial) do-it-yourself carbonated beverage maker. This new product is something to look forward to and should result in higher sales of the company.

However, the retailer plans to raise prices of coffee since rising green coffee costs has been eating into its profits. This might result in lower volumes as higher prices might make customers shift to other cheaper options.

Takeaway

It is clear that the company is doing really well. Also, it is expected to do well in the future since it provided a bright outlook for the next year. Moreover, it made share repurchases and increased its dividend by 15%. These factors, along with higher demand for its single serve packs, make this coffee retailer an interesting pick.