Farmer Bros - Earnings Call - Q1 2026

Executive Summary

• Q1 FY26 revenue declined 4.1% YoY to $81.6M amid softer coffee pounds and a challenging macro, while gross margin compressed 420 bps YoY to 39.7% on record green coffee inflation and tariffs; adjusted EBITDA held flat at $1.4M as cost actions offset pressure.
• Versus S&P Global consensus, revenue missed ($86.3M* vs $81.6M) and EBITDA missed ($2.20M* vs $0.27M*), while Primary EPS was roughly in line (-$0.11* cons vs -$0.11* actual on SPGI basis; GAAP diluted EPS was -$0.19).
• Management reiterated no near‑term price increases and now expects FY26 gross margins to average in the “high 30s” (previously “below 40%”), reflecting sustained coffee cost inflation and tariffs; SG&A was reduced by ~$4M YoY, helping stabilize adjusted EBITDA.
• Strategic setup: SUM>One brand early wins and a new Eurest partnership (50 branded cafes) support medium‑term growth; the strategic alternatives process announced in July remains underway, presenting a potential stock catalyst alongside tariff‑exemption developments.

What Went Well and What Went Wrong

What Went Well

• Cost discipline: Operating expenses fell to $35.6M (vs $40.1M YoY) with $2.5M lower G&A and $1.4M lower selling expense; adjusted EBITDA stable at $1.4M despite revenue and margin pressure.
• Commercial progress: SUM>One brand “early wins” and a new Eurest partnership to open 50 SUM>One cafes; white‑label pipeline focus to utilize Portland facility (SQF, LEED Silver).
• Clear operating narrative: “We were able to maintain the majority of [FY25] progress…hold steady in terms of adjusted EBITDA and still achieve gross margins of approximately 40%,” CEO John Moore said, emphasizing execution on efficiency and cost structure.

What Went Wrong

• Top‑line softness: Net sales fell 4.1% YoY to $81.6M on lower coffee pounds and macro headwinds impacting restaurant traffic and consumer behavior.
• Margin compression: Gross margin decreased 400 bps YoY to 39.7%; management now expects FY26 gross margins to average in the high 30s given green coffee inflation and tariffs, with no price actions planned near term.
• Cash usage and inventory build: Operating cash flow was -$5.0M in the quarter; inventories increased to $55.2M from $49.8M at June 30, partially reflecting cost pressures and working capital dynamics.

Transcript

Operator (participant)

Good afternoon and welcome to the Farmer Brothers Fiscal First Quarter 2026 Earnings Conference Call. At this time, all participants are in listen-only mode. As a reminder, this call is being recorded. Today, the company filed its Form 10-Q and issued its first-quarter results press release, which are available on the investor relations section of Farmer Brothers. website at farmerbros.com. The release is also included as an exhibit on the company's Form 10-Q and is available on its website and the Securities and Exchange Commission's website at sec.gov. A replay of this audio-only webcast will also be available on the company's website approximately two hours after the conclusion of this call.

Before we begin the call, please note all financial information presented is unedited, and various remarks made by management during this call about the company's future expectations, plans, and prospects may constitute forward-looking statements for purposes of the Safe Harbor Provision under the federal securities law and regulations. These forward-looking statements represent the company's view as of today and should not be relied upon as representing the company's view as of any subsequent date. Results could differ materially from those forward-looking statements. Additional information on factors which could cause actual results and other events to differ materially from those forward-looking statements is available in the company's release and public filing. On today's call, management will also reference certain non-GAAP financial measures, including Adjusted EBITDA and Adjusted EBITDA margin, in assessing the company's operating performance.

A reconciliation of these non-GAAP financial measures to their most directly comparable GAAP measures is also included in the company's release and SEC filings. I will now turn the call over to Farmer Brothers' President and Chief Executive Officer, John Moore. Mr. Moore, please go ahead.

John Moore (President and CEO)

Good afternoon, everyone, and thank you for joining us. This quarter, we continue to realize significant benefits from our operational efficiency and cost management initiatives, as we saw a $4 million improvement in our SG&A expenses compared to the first quarter of fiscal 2025. Farmer Brothers, however, continues to face pressure from a very challenging economic environment, which contributed to a year-over-year decline in revenue and overall coffee pounds. While revenues decreased 4% to $81.6 million, our Adjusted EBITDA for the year was flat on a year-over-year basis at $1.4 million, and we were able to maintain gross margins of approximately 40%. As we said in our last call, Farmer Brothers is committed to driving top-line revenue and addressing customer and coffee pound degradation in 2026. We are working to re-energize our DSD network with a number of sales and field operation initiatives to support these efforts.

We are cultivating a unified sales team through comprehensive organization-wide training and growth-oriented key performance indicators. We continue to develop a culture of accountability focused on driving product penetration within existing accounts, as well as adding new ones. With our Good, Better, Best brand pyramid firmly in place and our additional allied goods and equipment service offerings, we believe Farmer Brothers is uniquely positioned to meet the needs of customers across a wide variety of channels, no matter their size. We also have a renewed focus on growing our white-label customer portfolio in fiscal 2026, as we look to fully utilize our Portland, Oregon, roasting and manufacturing facility, along with the expertise of our highly skilled sourcing and product development teams.

Our Portland facility, which is SQF and LEED Silver certified, gives us the ability to quickly scale production from value-engineered commercial blends to the highest quality specialty coffees, while also providing a wide variety of diverse packaging possibilities. We continue to achieve early wins with our SomeOne Coffee Roaster specialty brand. Our recently announced partnership with Eurest will open 50 SomeOne branded cafes across the country. SomeOne is also already appearing in a number of higher education institutions, including UCLA. With that said, the macro and microeconomic environments continue to present significant challenges for Farmer Brothers and the industry as a whole. The National Restaurant Association recently reported that restaurant foot traffic declined for the seventh straight month in August, as consumers continue to shift their spending and dining habits as a result of economic uncertainty.

According to recent reports, the average price of a cup of coffee has increased 20% compared to last year, more than any other item tracked by the government. The impact of tariffs, supply chain concerns, and weather forecasts continue to drive the price of coffee to all-time highs. The 50% tariff imposed on U.S. imports from Brazil, which, as you know, supplies one-third of America's unroasted coffee, has put further pressure on the market. While our planning and procurement team has reconstructed our sourcing methodologies to increase elasticity without sacrificing quality, we do expect to see a significant increase in our cost of goods sold throughout fiscal 2026. Farmer Brothers continues to work with industry organizations to have coffee exempt from certain tariffs, as it is an unavailable natural resource in the U.S. Less than 1% of the coffee consumed by the U.S.

is domestically grown in Hawaii and Puerto Rico. While we are encouraged by recent news regarding its possible exemption, we do expect to see continued pressure on gross margin and revenue performance throughout this fiscal year. Despite these headwinds, we remain committed to driving growth and creating value for our shareholders in fiscal 2026 and beyond. The changes we have made have created a stronger, healthier Farmer Brothers, and we are excited to see what we can achieve once market conditions become more favorable. With that, I'll turn it over to Vance to discuss our financial results in more detail. Vance?

Vance Fisher (CFO)

Thanks, John, and good afternoon, everyone. As anticipated, in the first quarter, we started to see expected pressure on our financial results as a result of the unprecedented green coffee market conditions and the associated impact to our cost of goods. As such, Adjusted EBITDA for the first quarter was essentially flat compared to the prior year at $1.4 million. The actions we've taken over the past year to improve our cost structure have helped to offset the impact of the record green coffee inflation and the softening of our top-line revenue. From a top-line perspective, net sales during the first quarter were down 4% to $81.6 million compared to $85.1 million during the prior year period.

As we stated on last quarter's call, due to the unprecedented rise in green coffee costs and our decision to hold on further pricing actions, we expected to see gross margin compression beginning in the first quarter that would push gross margins below 40% throughout fiscal 26. For the first quarter, gross margins came in at the high end of our expectations at 39.7%, a roughly 400 basis points decline compared to the first quarter of last year. As we mentioned last quarter, we do not currently have plans to take additional price in the near term. As a result, we expect continued pressure on gross margins and anticipate margins to average in the high 30s throughout fiscal 26. The work we've done over the past year in driving efficiency in our cost structure continues to positively impact our results.

For the first quarter, operating expenses decreased $4.5 million to $35.6 million, or 43.6% of net sales, compared to $40.1 million, or 47.2% of net sales in the prior year period. This includes a $1.4 million decrease in selling expenses and a $2.5 million decrease in general and administrative expenses, both primarily driven by reduced personnel-related costs. For the first quarter, Farmer Brothers recorded a net loss of $4 million compared to a $5 million net loss in the first quarter of fiscal 2025. As of September 30, 2025, we had $3.8 million of unrestricted cash and cash equivalents and $31.2 million available under our revolving credit facility. Looking ahead, we expect market conditions to remain challenging and put pressure on our financial results throughout fiscal 2026.

However, we believe we have made the appropriate adjustments to weather these conditions and be well-positioned to generate significant shareholder value once more normal market conditions return. With that, I'll turn it back over to John. John?

John Moore (President and CEO)

Thanks, Vance. While there is no doubt this year will be a challenging one for the coffee industry, Farmer Brothers remains committed to driving revenue, managing costs, and addressing customer and coffee pound degradation. To achieve these goals, we must unlock the full power and potential of our DSD network as we look to drive product penetration with existing customers while also adding new accounts, both at the route and key account levels. Furthermore, we will look to leverage our core coffee capability as we grow our white-label customer portfolio and better utilize our world-class Portland facility. While these efforts cannot wholly offset the impact of the economic environment, we, as always, will continue to focus on delivering the right products to the right places at the right time and at the right value proposition while providing unparalleled customer service.

As always, I want to thank our teams for their hard work and dedication, and thank you all for joining us on the call today. Operator, we will now open it up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then star one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then star two. We will pause a moment as callers join the queue. Once again, if you have a question, please press star then star one. Since there are no questions, this concludes our question and answer session and today's conference call. Thank you for attending today's presentation. You may now.