Farmer Brothers Co. (NASDAQ: FARM), a leading national coffee roaster, wholesaler, equipment servicer and distributor, reported its financial results for the third quarter of fiscal year 2024, showcasing continued progress in its transformational initiatives.
For the full fiscal year 2023, Farmer Brothers reported annual net income of -$79.18 million, annual revenue of $339.96 million, annual operating cash flow of -$6.88 million, and annual free cash flow of -$21.90 million. These results demonstrate the challenges the company has faced in recent years as it works to reposition its business.
In the third quarter of fiscal 2024, the company reported net sales of $85.4 million, relatively flat compared to the prior year period's $85.7 million. The slight decrease was primarily due to a reduction in unit sales, which was partially offset by higher pricing and improved product mix. Gross profit during the quarter increased 19% year-over-year to $34.2 million, with gross margin expanding 660 basis points to 40.1%. This margin expansion was driven by improvements in pricing and a decrease in underlying commodity costs.
Operating expenses decreased slightly from $35.6 million in the prior year period to $34.7 million, as a $2.3 million increase in net gains from asset sales offset a $1.3 million increase in selling expenses and a $0.2 million increase in general and administrative expenses. The increase in selling expenses was primarily due to higher healthcare benefits and vehicle rental costs, partially offset by lower advertising-related expenses.
Net loss from continuing operations improved significantly, moving to $0.7 million in the quarter compared to a $6.9 million loss in the prior year period. Adjusted EBITDA remained positive for the second consecutive quarter at $0.3 million, compared to a $0.6 million loss in the prior year period.
Business Overview
Farmer Brothers is a leading national coffee roaster, wholesaler, equipment servicer and distributor, serving a wide variety of customers from small independent restaurants to large institutional buyers. The company's product lines include organic, Direct Trade and sustainably produced coffee, as well as tea, culinary products and other beverages.
The company operates a production facility in Portland, Oregon and distributes its products through a nationwide direct-store-delivery (DSD) network of 243 delivery routes and 105 branch warehouses as of March 31, 2024. Farmer Brothers relies on 3PL service providers for its long-haul distribution.
In recent years, Farmer Brothers has been undergoing a significant transformation, shifting its focus to becoming a DSD-based organization and optimizing its operations. This has included initiatives such as consolidating roasting, packaging and production at its Portland facility, upgrading handheld devices for its route sales representatives, and implementing a brand pyramid and SKU rationalization project to simplify its product offerings.
Financial Position and Liquidity
As of March 31, 2024, Farmer Brothers had $5.5 million in unrestricted cash and cash equivalents, $0.2 million in restricted cash, and $30.5 million of availability under its $75.0 million revolving credit facility. The company had $23.3 million in outstanding borrowings under the revolver and had utilized $4.6 million of the letters of credit sublimit.
In fiscal 2024, the company anticipates spending between $12.0 million and $15.0 million in capital expenditures, which it expects to finance through cash flow from operations and borrowings under its credit facility. Management believes the company is adequately capitalized to finance its operations and expects to achieve its goal of being free cash flow positive in early fiscal 2025.
Transformation Progress and Outlook
Farmer Brothers has made significant progress in its transformation efforts, though the company acknowledges there is still much work to be done. During the third quarter, the company reached an "inflection point" as customer retention trends stabilized and the rate of customer decline improved compared to the prior year.
The company's brand pyramid and SKU rationalization initiative is a key focus, with more SKUs related to the new tiered coffee offerings now in inventory than the previous product catalog. This is leading to scheduling and production improvements, as well as increases in in-stock and delivery capabilities. Farmer Brothers expects to complete this initiative by the end of the first quarter of fiscal 2025.
Additionally, the company has made investments in technology, including upgrading handheld devices for its route sales representatives and implementing a new CRM system. These initiatives are aimed at improving inventory management, invoicing, customer service and overall operational efficiency.
Risks and Challenges
Farmer Brothers faces several risks and challenges as it continues its transformation. The company operates in a highly competitive industry, with pressure from both large national players and smaller, local roasters. Commodity price volatility, particularly for green coffee, can also impact the company's profitability.
Additionally, the company's shift to a DSD-based model and the associated operational changes introduce execution risks. Failure to effectively implement these initiatives could negatively impact the company's customer relationships and financial performance.
Conclusion
Farmer Brothers' third quarter results demonstrate the progress the company is making in its transformation efforts, with improvements in gross margin, adjusted EBITDA and customer retention trends. While challenges remain, the company's focus on optimizing its operations, simplifying its product offerings and investing in technology are laying the groundwork for long-term success.
As Farmer Brothers continues to execute on its strategic initiatives, investors will be closely watching for further evidence of the company's ability to drive profitable growth and enhance shareholder value.