Earnings Miss of the Week: Slowing Sales, High Costs Impact Farmer Brothers Profits

Specialty coffee roaster Farmer Brothers (FARM) missed profit expectations for the quarter ended June 30, as slowing sales growth and persistently high coffee prices weighed on profitability amid a restructuring effort.

The company posted a net loss of $79.18 million, or 84 cents per share, which was more than projections of 61 cents per share and well above a $15.66 million loss in the year-ago quarter. Revenue rose 8% for the year to just under $340 million, but this was accompanied by a lower gross margin, which fell to 33.7% from 42.5% a year ago.

The latest quarter caps off a challenging year for the company, which has grappled with slowing sales growth due to a pullback in discretionary spending, along with persistently high coffee prices, which have led to higher supply costs. While per-pound coffee prices have fallen from their early 2022 peak, they were still 28% higher on average than their historical mean in the latest fiscal year.

Earlier this summer, Farmer Brothers divested its coffee roasting facility in Northlake, Texas and a majority of its direct-ship customers, as part of a restructuring effort aimed to reduce costs and pay off debt.

Chief Executive Officer (CEO) Deverl Maserang agreed to step down amid a leadership shakeup, passing on the reins to Head of Coffee John Moore, who will become interim CEO on October 1. Executives are optimistic about the coffee roaster's future, and are confident the latest quarter marked a fiscal turning point.

"The company enters fiscal 2024 with our full focus on a revitalized direct store delivery (DSD) business, a stronger balance sheet and a favorable coffee pricing environment," said the departing CEO in a statement.

The company is also investing in artificial intelligence (AI) capabilities. Its AI-backed pricing engine, which uses data from 40,000 customers, has enabled the company to develop a streamlined pricing model and improve its margins.

Farmer Brothers could also benefit from lower coffee prices in the quarters to come. Coffee futures have fallen more than 40% from their highs early last year and were last trading at $1.59 per pound, which is down from a peak of almost $2.60 in February 2022. However, that compares with prices below $1 per pound in June 2020.

Coffee beans are the company's core raw material used for roasting coffee. When their prices rise, it increases supply costs, and vice versa.

Farmer Brothers shares surged more than 12% Thursday, and are up over 30% since Monday. However, they've shed almost half their value so far this year.