Trouble Brews at Keurig Green Mountain

A chilled-beverage machine isn't the only thing running cold at Keurig right now. Image: Keurig Green Mountain.

For decades, the typical American coffee experience involved brewing an entire pot of coffee at a time. Keurig Green Mountain changed all that, with its single-serve home brewers making it possible to get cups of different types of coffee on demand for everyone in a given household. Yet after years of huge growth, Keurig has recently faced more questions about whether it still has the future potential that investors want to see from the company. Coming into Wednesday afternoon's fiscal second-quarter financial report, Keurig Green Mountain had already seen its shares decline substantially from their highs near the end of 2014, but bigger declines in earnings and weaker sales than expeted poured more cold water over shareholders' expectations. Let's look more closely at what happened to Keurig Green Mountain this quarter and what the results mean for the rest of the year.

Keurig Green Mountain serves up cold numbersKeurig Green Mountain's fiscal second-quarter results were tepid at best. Sales rose 2% to $1.13 billion, marking gains at less than half the pace that investors had wanted to see. Even worse, the company's net income actually fell compared to the prior year's quarter, with a 4% drop in net income resulting in adjusted earnings of $1.03 per share, down a nickel from the year-ago period missing the consensus estimate by about 2%.

Looking at the various segments of Keurig Green Mountain's business, portion-pack sales were the best-performing group, rising 7% and continuing to carry the company forward. Unit demand climbed considerably faster, with the 14% rise in equivalent-servings volume offset by a 7-percentage-point hit as customers changed their product mix by trading down to lower-priced products.

As we've seen recently, poor sales of brewer machines and accessories pulled down Keurig's overall results. With sales of 1.4 million brewers during the quarter, net sales fell 23%, and high inventory levels at retail outlets made it difficult for Keurig to keep up its volumes. Sales of other products also fell at a 5% pace in the quarter.

Keurig also continued to struggle in gaining traction beyond its core U.S. market. Domestically, sales rose 3% during the quarter, but Keurig's Canadian segment saw revenue decline 5%. Yet the strong dollar was the big culprit there, with currency-neutral Canadian sales actually climbing 6%.

CEO Brian Kelley tried to take the results in stride, blaming "the slower than expected transition to the Keurig 2.0 system" for much of the decline in top-line growth. "We are taking actions to reduce brewr inventories," Kelley said, "enhance our 2.0 brewer packaging to better communicate our extensive brand variety and step up innovation on our owned brands."

Keurig Green Mountain sees a slower 2015Despite Kelley's optimism, the company cut its outlook for the 2015 fiscal year, adding to anxiety that had already existed about slower growth than most had expected coming into the current year. Keurig now believes that sales growth will at best grow by low-single digit percentages, down from high-single digit guidance earlier in the year. Similarly, whereas Keurig had expected slight earnings growth for the full year previously, it now believes that adjusted earnings will decline in the mid-single-digit percentage range.

In addition, lower guidance for the current fiscal third quarter is also troubling. Adjusted earnings of $0.75 to $0.80 per share are far lower than the $1.08 that most investors are looking to see, and the company didn't have much offsetting good news to give to shareholders looking for a silver lining to the warning.

Kelley tried to point to the road ahead. "We remain highly confident in our long term strategy for the Keurig hot system and continue to believe there is a significant runway of opportunity," Kelley said, and "combined with the upcoming launch of our Keurig KOLD system, we expect the Keurig brand to further expand and globalize while continuing to transform the premium home beverage experience for consumers."

Investors in Keurig Green Mountain weren't satisfied with that explanation, however, hitting the stock hard with losses of about 11% in the first hour of after-market trading following the announcement. With Keurig no longer getting any benefit of the doubt from shareholders, the company will have to prove that its future opportunities will be more profitable before many investors are willing to regain their confidence in the stock's future.

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Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Keurig Green Mountain. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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