Revenue slumps owing to loss of business from major wholesale customer
Specialty coffee brewer and retailer Coffee Holding Co. Inc. (NASDAQ: JVA) announced its financial results for Q2 FY16 ended April 30th, 2016, on June 3rd, 2016. The Company is one of the few coffee companies that offers a broad array of coffee products and has been a family-operated business for three generations. Its products are divided into approximately three categories: Wholesale Green Coffee, Private Label Coffee and Branded Coffee, and are sold in the U.S., Canada, and internationally to supermarkets, wholesalers, and retail customers. Read more about its financial performance below.
Loss of major customer
Coffee Holding’s net sales for Q2 FY16 slumped 29.3% to $21.41 million versus $30.26 million in the comparable quarter in 2015. Net sales were dragged down to a large extent by the lower coffee prices during the quarter and the reduction in wholesale business of approximately $8.15 million with Keurig Green Mountain Inc.
It is pertinent to note that Keurig, a leading single serve roaster, was a major customer of Coffee Holding. The Company derived more than half its revenue from selling green, or unroasted, coffee beans to Keurig. However, Keurig was taken over by JAB Holding Co. for $13.9 billion, and the acquisition was completed in March 2016. Hence, with the sudden drop in sales to its major customer, Coffee Holding’s revenue took a beating during the quarter under review. In the specialty coffee business, Coffee Holding directly competes with Peet’s Coffee & Tea Inc., Caribou Coffee Co. Inc., and Starbucks Corp. (NASDAQ: SBUX).
Financials looking up
Cost of sales for Q2 FY16 fell to $18.09 million, or 84.5% of net sales, as compared to $31.34 million, or 103.6% of net sales, in the year-ago period, mainly due to the lower cost of green coffee and packaging materials as well as realized and unrealized gains or losses on hedging activity. The decrease in cost of sales also reflects lower commodity prices and reduced wholesale transactions with Keurig.
On the brighter side, Coffee Holding’s gross profit for Q2 FY16 was $3.31 million, an increase of $4.38 million from $(1.07 million) in the year-ago period. Gross profit as a percentage of net sales increased to 15.5% during the quarter under review from (3.6%) in the year-ago quarter, mainly due to improved margins of its wholesale and roasted business as well as reduced losses in its hedging operations.
As a result, total operating expenses decreased to $1.95 million for Q2 FY16 from $2.07 million in the year-ago quarter, owing to a decline in selling and administrative expenses to $1.78 million for Q2 FY16 from $1.89 million in the comparative period last year.
This helped the Company swing to profits of $8.3 million, or $0.14 per share basic and diluted, for Q2 FY16 compared to a net loss of $2.05 million, or $(0.33) per share basic and diluted for the year-ago quarter.
Having achieved profits in the past four consecutive quarters, things are looking up for Coffee Holding despite competitive pressures and fluctuating coffee prices. The Company is looking to move away from commodity sales of wholesale green coffee to better branding, farm identification, traceability, and sales of specialty gourmet micro lots of Arabica coffees. In addition, the Company will also increase sales of its flagship brand, Café Caribe, in both existing and new markets. Coffee Holding has teamed up with Wal-Mart Stores Inc. (NYSE: WMT) to launch Café Caribe in about 400 stores later in June 2016. Coffee Holding has also joined hands with a large regional supermarket chain to launch its products in an expected 200 stores later this summer.