Farmer Brothers Fiscal Q2 2026 Earnings Call - Margins Squeezed as Company Absorbs Green Coffee Inflation, Adjusted EBITDA Barely Positive
Summary
Farmer Brothers reported a quarter where rising green coffee costs finally hit the P&L, and management largely absorbed those increases rather than push immediate price hikes. Net sales slipped 1% to $88.9 million, coffee pounds fell just under 3%, and gross margin plunged 680 basis points year-over-year to 36.3%, leaving adjusted EBITDA at a marginal $484,000 and a GAAP net loss of $4.9 million.
Management points to deliberate pricing restraint, some cost control in SG&A, and a hope that recent declines in Arabica and Robusta prices, plus tariff easings, will start to ease margins in Q4 of fiscal 2026 with clearer benefits in fiscal 2027. Liquidity is limited, with $4.2 million in unrestricted cash and $24.6 million available under the revolver, and a strategic committee remains active in evaluating options to maximize shareholder value.
Key Takeaways
- Net sales were $88.9 million in Q2 FY2026, down 1% year-over-year from $90 million.
- Total coffee pounds shipped declined just under 3% year-over-year.
- Gross margin fell to 36.3% in the quarter, a 680 basis point decline versus the prior-year period.
- Adjusted EBITDA was only $484,000 for the quarter, down from $5.9 million a year ago.
- GAAP net loss for the quarter was $4.9 million, compared to $0.2 million net income in Q2 FY2025.
- Management attributes margin pressure largely to green coffee inflation and its decision to delay further customer pricing actions.
- Year-to-date gross margin was 38%, in line with company expectations, and management expects average gross margins in the high 30s for the fiscal year.
- Company expects some margin relief beginning in Q4 FY2026 if recent declines in Arabica and Robusta prices and tariff reductions continue, with more meaningful benefit anticipated in FY2027.
- Operating costs improved, decreasing $1.4 million to $36.4 million, or 40.9% of net sales, versus 42% in the prior-year quarter.
- Selling expenses decreased about $100,000, and G&A expenses declined about $700,000, primarily due to reduced personnel-related costs.
- Liquidity stood at $4.2 million of unrestricted cash, with $24.6 million available under the revolving credit facility.
- Management plans to push growth via its DSD network, expand white label customers, and better utilize the Portland SQF and Silver LEED certified roasting facility.
- Company formed a strategic committee in July 2025 that remains active in assessing strategic opportunities to maximize shareholder value.
- Management cited weaker downstream consumer behavior and low U.S. consumer confidence as a headwind to near-term demand.
Full Transcript
Conference Moderator, Farmer Brothers: Good afternoon, and welcome to the Farmer Brothers Fiscal Second Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded. Today, the company filed its Form 10-Q and issued its second 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 unaudited, and various remarks made by management during this call about the company’s future, future expectations, plans and prospects may constitute forward-looking statements for purposes of the safe harbor provisions under the federal securities laws and regulations. These forward-looking statements represent the company’s views as of today and should not be relied upon as representing the company’s views 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 filings. 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.
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 Chief Executive Officer, Farmer Brothers: Good afternoon, everyone, and thank you for joining us. This quarter, as anticipated, was a more challenging one for Farmer Brothers as we saw pressure across our results due to higher cost inventory flowing through our COGS and continued micro and macroeconomic pressures. Despite these challenges, we continued to see year-over-year improvement in our selling and general and administrative costs, and our gross margin remained above 35%, where we anticipate it will stay for the remainder of the fiscal 2026. Although we maintained solid gross margins and effectively managed our cost structure in a difficult operating environment, our adjusted EBITDA for the quarter was only slightly positive at approximately $500,000. We also saw modest year-over-year decreases in our total coffee pounds and net sales.
Coffee pounds decreased just under 3%, while net sales were down 1% to $88.9 million for the quarter compared to the prior year period. The industry also continues to see pressure in terms of downstream consumer behavior. According to a January Conference Board report, U.S. consumer confidence slumped to its lowest level since May 2014. Likewise, a January statement from surveys of consumers reported that consumers continue to feel pressure on their purchasing power, with national sentiment more than 20% lower than it was a year ago. Despite these challenges, Farmer Brothers remains committed to driving top line revenue growth and addressing customer and coffee pound degradation. We must continue to 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.
Furthermore, we will look to leverage our core coffee capability as we grow our white label customer portfolio and better utilize our world-class SQF and Silver LEED certified Portland roasting facility. We’re also encouraged by recent reductions in tariff rates in several countries where we source coffee and by the recent declines in both the Arabica and Robusta commodity markets. If these trends continue, we expect to start seeing some improvement in gross margins beginning in the fourth quarter of fiscal 2026, with further benefits in fiscal 2027. Finally, we continue to evaluate all avenues to maximize shareholder value. In July of last year, we announced the formation of a strategic committee, which remains actively engaged in assessing potential opportunities. We will provide additional information regarding those efforts when appropriate. With that, I’ll turn it over to Vance to discuss our financial results in more detail. Vance?
Vance, Financial Executive, Farmer Brothers: Thanks, John, and good afternoon, everyone. As we communicated last quarter, and as John stated, during the second quarter, we started to more fully realize the impact of green coffee inflation on our cost of goods sold. As such, Adjusted EBITDA for the quarter was $484,000, compared to $5.9 million in the prior year period. From a top-line perspective, net sales during the quarter were down 1% to $88.9 million, compared to $90 million during the prior year period. As we stated on last quarter’s call, due to the rising green coffee costs and our decision to hold on further pricing actions, we expected a decline in gross margins throughout the year. During the quarter, gross margin was 36.3%, a 680 basis point decline compared to the prior year period.
Overall, year-to-date gross margin was in line with our expectation at 38%. We do expect gross margins to remain pressured and average in the high 30s for the fiscal year, but as John mentioned earlier, we do anticipate some relief starting in the fourth quarter due to recent declines in the green coffee market. Overall, operating costs for the quarter decreased $1.4 million to $36.4 million, or 40.9% of net sales, compared to $37.8 million, or 42% of net sales in the prior year period. This included a $100,000 decrease in selling expenses and a $700,000 decrease in G&A expenses, primarily due to reduced personnel-related costs. We recorded a net loss of $4.9 million in the second quarter, compared to $200,000 of net income in the second quarter of fiscal 2025.
As of December 31, 2025, we had $4.2 million of unrestricted cash and cash equivalents and $24.6 million available under our revolving credit facility. With that, I’ll turn it back over to John. John?
John Moore, President and Chief Executive Officer, Farmer Brothers: Thanks, Vance. In summary, we did see expected pressure on our overall results during the quarter, but we remain confident we are on the right path. We will continue to focus on controlling what we can control as we work to grow our top line, as well as overall coffee pounds and customer counts in the back half of fiscal 2026 and beyond. With that, I’d like to thank our teams for their continued commitment and execution and to thank each of you for joining us on the call today.
Conference Moderator, Farmer Brothers: The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.
