Green Mountain Bears Find More Grounds for Pessimism
07/13/2012| 05:19pm US/Eastern
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--Green Mountain shares have lost more than 80% of value since September peak
--Stifel analyst lowers earnings estimates, citing increased competition for K-cups
--Short trader, whistleblower, question Green Mountain's accounting practices
By Annie Gasparro
Green Mountain Coffee Roasters Inc. (>> Green Mountain Coffee Roasters Inc.), despite its continued rapid sales growth, saw its shares take yet another beating Friday as a slew of nonbelievers lowered earnings expectations and questioned its accounting methods.
Shares in Green Mountain, which sells Keurig single-serve coffee brewers and associated K-cup portion packs, closed down 7.4% at $19.70 in Friday trading. The stock has lost more than half its value this year and is down more than 80% since peaking in September.
Stifel Nicolaus analyst Mark Astrachan reduced his expectation for Green Mountain's annual earnings to $1.80 per share, from $2.27, for fiscal 2013, which begins in the fall.
Two of Green Mountain's K-cup patents are set to expire in September, opening it up to new competition from private-label brands planning lower-priced offerings and from the coffee companies it currently partners with starting to manufacture their own portion packs instead of going through Green Mountain.
"Green Mountain is already losing share. I don't see how the pressure doesn't continue, or how their share doesn't continue to decrease over time as they lose business to their partner brands and private label once the patents expire," Mr. Astrachan said in an interview.
Supermarket operators Kroger Co. (>> The Kroger Co.) and Safeway (>> Safeway Inc.) recently announced plans to come out with their own single-serve coffee pods for use in Green Mountain's Keurigs this autumn. Around the same time, Starbucks Corp. (>> Starbucks Corporation) is planning to launch its own high-end, single-serve espresso brewer.
However, in the consumer products industry, new markets often open with a single brand, followed by off-brands and copy cats. In many cases, the original maintains a strong lead because of consumer loyalty and a head start in innovation, even after alternatives enter the market.
Green Mountain has dominated the growing single-serve coffee industry since acquiring the remainder of the Keurig business in June 2006, which gives it the "efficiencies and scale to support increasing consumer demand at a lower cost than its competitors," Green Mountain said in a recent regulatory filing. Additionally, Green Mountain said it has the advantage of a broad portfolio, selling more than 200 varieties of K-cups with brands such as Dunkin' Donuts and Starbucks. "Finally, the company continues to develop new products, including its recently introduced Keurig Vue brewer," which uses Vue Packs instead of K-cup technology, the filing states.
Mr. Astrachan argues that as competition emerges for K-cups, Green Mountain will be forced to lower its prices to keep customers. "A few pennies of reduced pricing has a meaningfully negative impact on earnings," he said. Additionally, it will have to spend more money on promotions.
Suzanne DuLong, a spokeswoman for Green Mountain, said, "The report erroneously defines the data that was reported and therefore the subsequent analysis is flawed. Specifically, it misrepresents the facts by comparing segment to consolidated numbers."
In May, Green Mountain lowered its earnings forecast for fiscal 2012, citing uncertain consumer demand for its Keurig single-serve coffee brewers and K-cup portion packs. However, its lowered projection of revenue growth of 45% to 50% for the year remains higher than most consumer products companies, especially in light of the recession.
Investors didn't anticipate an analyst paring back estimates, as Stifel is the only sell-side bank with a "sell" rating on the stock, Mr. Astrachan said.
Also, the lowered estimate comes the day after at least two high-profile reports alleged that Green Mountain is reporting inaccurate financial results. The company didn't respond to requests for comments for this story, but it has repeatedly stated that its accounting practices are legitimate and that it follows all reporting regulations.
Green Mountain short-seller Daniel Yu of LongShortTrader wrote Thursday that Green Mountain overstated its 2011 gross profit and net income by about $100 million and $160 million, respectively, through reporting a higher gross profit margin than it really generated. He said his analysis shows the profit margins of the individual business segments, revealed in a regulatory filing earlier this week, don't add up to its total reported number.
"The Stifel note today put the nail in the coffin," following "pent-up 'fear'" from Thursday's reports, Mr. Yu told Dow Jones.
A blog post Thursday by Sam Antar, a former accountant who was convicted of fraud and now advises law-enforcement agencies about white-collar crime, also questioned Green Mountain's financial reports. He said the financial performance of the company's Canadian business, Timothy's, appears to be "substantially overstated" in fiscal 2011.
In September 2010, the Securities and Exchange Commission began a probe of Green Mountain's accounting practices, which resulted in the company's restating its financial reports from fiscal 2006 to fiscal 2010.
Steven Russolillo and Mia Lamar contributed to this article.
Write to Annie Gasparro at annie.gasparro@dowjones.com
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