Keurig Green Mountain (GMCR, Financial) is a leader in specialty coffee, coffee makers, teas and other beverages and is recognized for its award-winning beverages, innovative brewing technology, and socially responsible business practices. Shares of the company have been down this year as many of the company’s plans have failed to deliver. In addition, the company’s terrible quarterly results put more downward pressure on the stock.
In Q2FY15, the company reported net sales of $1.1 billion increased 2% versus the prior year period primarily driven by growth in sales of pods partially offset by lower brewer and accessory sales. Foreign currency exchange rates negatively impacted sales by approximately 1 percentage point.
The 23% decline in Keurig’s brewer and accessory net sales compared to the prior year period was primarily due to a 22% decline in brewer sales volume, driven by high inventory levels at retail which negatively impacted shipments in the quarter and a difficult year ago comparison. Brewer net price realization declined by 1 percentage point and foreign currency exchange rates negatively impacted brewer net sales by roughly 1 percentage point.
Additionally, accessory net sales declined 31% compared to the prior year period. Sales of other products declined 5% during the quarter from the prior year period primarily due to the continuing demand shift from traditional coffee package formats to pods. For the quarter, gross margin declined 80 basis points versus prior year to 40.7% of net sales.
GAAP operating income declined 6%, representing 21.6% of net sales for the quarter, compared to 23.6% in the prior year period. Non-GAAP operating income declined 5%, representing 22.9% of net sales in the quarter, compared to 24.6% in the prior year period. GAAP diluted EPS declined 6% from the prior year period to $0.97. Non-GAAP diluted EPS declined 5% from the prior year period to $1.03.
After the downfall of Keurig 2.0, Keurig Kold’s destiny is in question
The Keurig 2.0 is not selling well, which will hurt pod sales eventually, and will also force the company to discount its brewers or take inventory write-downs. After the huge failure of Keurig 2.0, Keurig Kold may also begin to look less than desirable. During the live webcast event, it was announced that the Keurig Kold machine would cost $299-369 at retail and depending on point of sale. This is not a pleasant price point for a machine that offers little advantage. The Keurig Kold will launch this fall, direct-to-consumers only and the last thing Keurig wants is a second straight year where a major product launch does not go well.
Conclusion
Despite increase in net sales over the prior year, the company is facing problems with brewer and accessory sales, and the forthcoming launch of Keurig Kold may also not resolve these problems. In my opinion, investors should avoid Keurig as it will struggle throughout the year. Hence, I reckon Keurig is currently a sell.
