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It was positively dismal. Keurig Green Mountain (NASDAQ: GMCR) earnings hit Wednesday, and from what I can see, the fourth-quarter results were awful.
But for reasons that totally mystify me, the market appears to love the news. Keurig stock was up over $6 in after-hours trading. It gained 18% on Thursday. Maybe people expected things to be worse, but I don’t see how they could have been much worse.
Keurig’s fourth-quarter sales fell 12.9% to $1.04 billion, operating income dropped 20.9% to $200 million and net income stumbled 14.9% to $130 million. This helped drag down full-year numbers. For the full year, Keurig’s sales decreased 3.9% to $4.49 billion, operating income fell 13.9% to $859 million, and net income slid 10.9% lower to $566 million.
Faltering Sales of Keurig Pods
On nearly every metric, the news in the Keurig Green Mountain earnings report was bad. Just take a look at product sales. Fourth-quarter pod sales dropped 8.9% and brewers collapsed 31.9%.
I suppose selling 9.2 million brewers is a great thing. That’s still a lot of brewers to add to those already out there, so the product is obviously entrenched. That will certainly stimulate ongoing purchases of pods and provide some reliable cash flow, although investors looking for growth will find little solace there.
That point shouldn’t be overlooked. In the early days of Keurig, the stock was flying because of this innovative new product. Yet growth had to flag at some point. It’s a sad tale that a company can sell 9.2 million units of its flagship product, yet from a growth standpoint it means nothing.
The company offered no real information about the Keurig Kold product. I still do not believe this product will go anywhere. Just like SodaStream (NASDAQ: SODA), Keurig will find that consumers don’t care about homemade sparkling water or soda drinks. The market is already saturated because of SodaStream’s product. This will be nothing but a money pit for Keurig and the company even guided to a $125 million loss from this system in 2016.
The company also said it hopes to cut $300 million in costs over the next three years, of which $100 million will come next year at a cost of $12 million or so. That’s fine, but cutting expenses isn’t how one grows a business.
Buyback Was a Blunder
To me, the most egregious act of Keurig management was how it spent $1.033 billion buying back stock. What? A billion smackers to buy back stock at an average price of $107 per share? This is unconscionable. Sure, you can argue that management had no idea the stock would fall to $40, but it certainly knew that net income would decline this year. Why spend a billion dollars to reduce share count by 10% when that money had far better uses?
Meanwhile, Keurig also boosted the dividend by 13% to $1.30 per share. As long as the free cash flow remains stable, that’s just fine, but when viewed in context with the buyback, I hate the move.
All this is terrible news, and awful use of capital. But look at Keurig stock in after-hours, and you’d think the company was doing great.
None of this even speaks to the expected $125 million loss next year as it rolls out Keurig Kold, which I believe will be a total failure. Nobody wants sparkling water or soda they can make at home. SodaStream has proven that.
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