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Keurig Green Mountain Q4 2015 Quarterly Preview

Summary

Keurig Green Mountain will report after the closing bell on November 18.

Brewer sales are expected to decline with uncertainty related to K-cup sales results and gross margins.

K-cup pricing appears to need the attention of management as market share erosion sets in.

Analysts expecting a return to earnings and revenue growth in 2016 and guidance will be key to stock performance.

After the closing bell on November18th, Keurig Green Mountain (NASDAQ:GMCR) will disseminate their Q4 2015 results. With shares of GMCR trading off more than 70% from its all time high and down nearly 60% year-to-date, is now the time to consider acquiring shares of GMCR? Is the stock at or near the bottom? Those are the questions on some investors' minds as most recently some hedge funds are certainly piling into the stock and allowing others to exit.

According to Yahoo! Finance (NASDAQ:YHOO) the average analyst is expecting Keurig Green Mountain to report earnings of $.71 a share on 1.03bn in revenues for the most recently ended quarter. Given this expectation, earnings are modeled to fall roughly 20% and revenues are modeled to fall almost 14% versus the same period a year ago. Now let's take a look at the guidance for the 4th Quarter offered by Keurig Green Mountain on their last quarterly conference call.

Moreover, for the 4th quarter of 2015, the company expects net sales decline in the low teens and non-GAAP EPS of $0.70 to $0.75 per share. Keurig Green Mountain expects the 4th quarter revenue to be impacted by several factors. The prior year 4th quarter included approximately four-percentage-point benefit from retailers buying ahead of the fiscal year end SAP implementation and a two percentage point negative impact of the reserve for the MINI recall, netting two points of difficult comparison. Additionally, the company expects negative brewer shipment growth year-over-year of approximately 20 percent. Pod volumes will be affected by the impact of lower brewer sales on the installed base, continuing elevated competitive activity, particularly in the away-from-home channel, as well as a difficult comparison against SAP advanced ordering impact in the prior year. The company only expects minimal sales contribution from Keurig KOLD in the 4th quarter. And lastly, Keurig expects foreign exchange to negatively impact total revenue growth by approximately two percentage points.

Based on the company's official guidance, there doesn't seem to be a lot of hope for a near term turnaround to have or be occurring at Keurig Green Mountain. After a full year of declining brewer sales volumes and the first ever negative quarterly reporting of K-cup/portion pack sales, maybe investors would be inclined to await something more substantial from the company before adding risk. For traders, GMCR shares have been easily tradable as the stock continued to meander between $50 and $60 a share over the last 90 days and narrowing that range from $51 and $57 over the last several weeks. Lower highs in a downward flagging chart are rarely a positive sign and often indicate greater selling pressure than buying volumes. With that said, I tend to pay more attention to the underlying fundamentals supporting the stock performance.

With regards to Q4 2015 guidance, I would suggest that Keurig has managed to readjust investor sentiment. There are no positive indicators in the company's guidance for the quarter so anything that the company can positively produce beyond its guidance might help the stock performance near term. I'm skeptical as to this occurring, however. The data proliferating through the sales channels throughout the quarter suggests a couple of alarming trends have continued to go against Keurig during the Q4 2015 period. Only a few weeks ago did sales data come out that exhibited the worst declines ever for Keurig branded K-cups.

Two weeks prior I warned investors on Twitter (NYSE:TWTR) of some scary results for

coming out of retailers. The results showed the largest decline in Keurig branded K-cups ever, a roughly 18% decline.

As Keurig branded K-cup sales fell during the monthly period, Starbucks (NASDAQ:SBUX), Dunkin Donuts (NASDAQ:DNKN) and McCafe K-cups gained market share. While all three brands are licensed on the Keurig platform, the nature of the licensing relationships provides Keurig with less revenue than through the Keurig brand K-cups. I deem this the "win some, lose more" licensing relationship. It's the very reason you do not engage in these types of licensing deals and in the form of a commodity as a publicly traded entity. The biggest brands licensed with the best taste profile always win out; it is just a matter of time. With Keurig K-cups carrying a less favorable taste and less recognizable brand when compared to the prior licensed name brands, it should not be a surprise that Keurig is losing market share in the K-cup marketplace.

During the Q3 2015 period, Keurig K-cup profit margins contracted by 40 bps and due primarily to a sales mix shift in K-cups. What is so important for investors to consider here with regards to K-cup sales and profits is that as overall pod sales were down just 1% in the Q3 period, the company benefited from higher pricing and yet still the company witnessed profit margin contraction due to K-cup sales mix (pricing impact +110 bps).

This marks or identifies the impact of licensed brands gaining market share on the totality of the Keurig K-cup business. Again, this is the "win some, lose more" licensing impact for which Keurig will likely contend with for the foreseeable future. The single-serve coffee business is only getting more and more saturated with each passing quarter and promotional activity for pods is ever increasing. Based on all the aforementioned details, I...


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