Green Mountain Coffee Roasters (GMCR) Gets Roasted by the Market
Shares of Green Mountain Coffee Roasters (GMCR: Charts, News), the producer of the Keurig coffee machines which use its single-serving K-Cups, finally plunged off a cliff after months of speculation that the overheating stock was losing touch with its fundamentals.
Green Mountain, founded by Robert P. Stiller in 1981 as a small coffee shop in Vermont, currently has a market cap of $6.4 billion. The company went public in 1993 and has since acquired smaller rivals, such as Van Houtte, and carved out a name for itself in the single-serving coffee brewer industry. The company sells its Keurig coffee brewers at thin margins or at a loss in order to establish a steady stream of revenue from its higher-margin K-Cup single portion packs, which can only be used with its Keurig machines - a classic razor and razor blades business model.
Hedge fund manager David Einhorn has alleged that Green Mountain has a "litany of accounting questions", suggesting that the company's controversial restatement of earnings between 2007-2010 to include K-Cup royalties was indicative of the murkiness of its true bottom line. The restatement caused an SEC investigation into how Green Mountain recognizes revenue. CEO Lawrence Blanford fired back, denying any accounting wrongdoing by stating, "On the specific suggestion of financial misconduct, there is no wrongdoing. The audit committee has looked at it, and we're confident there's nothing there, period." However, Blanford stopped short to promise that the company wouldn't restate earnings again. The company has refused to respond to other questions regarding its valuation metrics.
Meanwhile, Blanford acknowledged that the company missed earnings due to weakness in its wholesale shipments, caused by weak consumer sentiment and grocery stores stocking up prior to its price increases in June. The company's K-Cup sales declined from $485.4 to $475.5 million from the previous quarter. CFO Frances Rathke stressed that although the sales of its K-Cups was disappointing, the demand for its Keurig brewers was not declining - a positive note that suggests that more customers this quarter will revive the demand for K-Cups, which fluctuates from quarter to quarter. The company has also been hit by higher coffee bean costs, which are forecast to rise into the first quarter of fiscal 2012. Despite these challenges, the company still expects sales of its brewers to rise by 65% by the end of fiscal 2012. The company has also partnered with Dunkin' Donuts (DNKN: Charts, News) and Starbucks (SBUX: Charts, News) to sell branded K-Cups, which has proved to be mutually beneficial.
For now, short sellers - who have long questioned the company's top heavy P/E and niche consumer-sensitive market - are winning. Over 21% of GMCR shares are currently being shorted. However, this leaves limited downside for new short sellers, and any improvement in the macro situation overseas could trigger a massive short cover, which could benefit patient value investors at these levels.
Other News About GMCR
Green Mountain 4Q Revenue Rises 91%, Misses Street's Target; Short Sellers Rejoice
Short sellers swarm Green Mountain shares despite the company's strong earnings.
David Einhorn's Bearish Call On Green Mountain Coffee Was Right. So What's Next?
Einhorn criticizes Green Mountain's murky valuation methods - should investors be concerned?
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