Keurig Green Mountain (GMCR) stock was up 35% in the five years prior to Wednesday’s close. But after the miserable Keurig earnings report yesterday afternoon, the writing is on the wall: GMCR will never see those sorts of returns again.
The meteoric growth and growing popularity of its now-ubiquitous K-Cup coffee pods and Keurig coffee machines even caught the attention of Starbucks (SBUX), who eagerly jumped into the market with brewing machines of its own.
But now GMCR is seeing increased competition from the likes of Starbucks, and it’s also alienated some of its own customers. Buffeted by a horrendous Keurig earnings report and one particularly ominous historical trend, GMCR stock looks doomed to underperform for years to come.
GMCR Earnings Are Bad
Keurig is off roughly 10% in early trading on Thursday after the Vermont coffee company missed second-quarter expectations on both earnings per share and revenue. GMCR EPS came in at $1.03, missing the consensus $1.05 estimate, while revenues of $1.13 billion also missed the $1.15 billion Wall Street was expecting.
No wonder GMCR is one of the single worst performers in the stock market today.
To make matters worse, GMCR committed a cardinal sin and lowered guidance too, completing the earnings season “triple whammy” by missing on EPS, revenue and future expectations. Ouch.
The Outlook Is Worse
But perhaps the most ominous harbinger of Keurig’s bleak future was the part where the company forecast flat to low-single digit sales growth. A Harvard Business Review study (see bar chart) analyzing revenue growth rates at large corporations between 1955 and 2006, shows that once revenue growth ends, it’s pretty much over forever.
Source: Harvard Business Review
Though the HBR study curiously found that companies often accelerate growth the year before it ultimately flatlines and essentially disappears, the clear takeaway from the chart is clear: Once growth leaves, it’s gone forever. Poof! Adios.
Ivy League statisticians aren’t the only ones indicating Keurig’s glory days are over. The Wall Street Journal reports that the company’s own customers have taken to the websites of Walmart (WMT) and Amazon (AMZN) to complain about the Keurig 2.0, the company’s most recent brewer which was released last year.
The Keurig 2.0 was a botched attempt to protect Keurig’s market share: The machines are incompatible with coffee pods not officially licensed as K-Cups, but are also incompatible with old K-Cups made before last summer. That fact left some customers pretty peeved, as they went out and spent between $150 and $200 on a brewer only to come home and find that their old K-Cups were useless.
Not surprisingly, a “slower than expected transition to the Keurig 2.0” was partially responsible for the lackluster quarter.
If you own GMCR stock, it hurts to sell on a day like this. But it’ll hurt worse if you’re still holding the bag 10 years from now with Keurig dragging down your portfolio.
This quarter makes it crystal clear: No amount of caffeine can get this stock going again.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
