Green Mountain plunges in Christmas for shorts

Thu May 3, 2012 7:31pm EDT

1 of 8. Green Mountain Coffee single-serve K-Cups are pictured in New York, May 3, 2012. The company's management is quickly losing credibility with Wall Street after it badly missed sales estimates for the second time in three quarters, wiping out close to half of its market value.

Credit: Reuters/Brendan McDermid

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(Reuters) - Green Mountain Coffee Roasters Inc's (GMCR.O) stock shed almost half its value on Thursday, as management lost the confidence of Wall Street after the company cut its outlook and again badly missed sales estimates.

Short sellers who have been questioning Green Mountain's accounting practices for months said the results add weight to allegations by hedge fund manager David Einhorn and others that the company had been inflating sales and that its high-growth days were over.

"Last night, I was like a kid on the night before Christmas at the Christmas tree, while I was waiting for their (earnings) release," said John Del Vecchio, portfolio manager of The Active Bear ETF (HDGE.P), who has been short Green Mountain since 2011.

"This is the beginning of the end," he said. "We're not covering a share."

The maker of Keurig coffee brewers cut its financial forecast for the year on Wednesday and warned of slowing growth after demand for K-Cup coffee refills fell far short of expectations in the March quarter.

The results and comments shook the faith of some analysts who had previously stood by the stock even as Einhorn questioned the company's accounting practices and the impact of the expiration of two patents in September.

Since September 2010 Green Mountain has also been facing an inquiry by the Securities Exchange Commission into how it recognizes some revenue and its relationship with a vendor.

A Green Mountain spokeswoman said Thursday that the company adhered to recognized accounting regulations.

"As noted in our Annual Report on Form 10-K for our fiscal year ended September 24, 2011, our independent registered public accountants gave us a clean opinion," the spokeswoman, Suzanne DuLong, said. "For the last two quarters, they have done their review and we continue to comply with generally accepted accounting principles."

Some sell-side analysts criticized Green Mountain Chief Executive Larry Blanford for not being able to clearly explain why demand was less than the company expected on the earnings conference call on Wednesday.

"We've just got a lot of moving parts, and I think we continue to increase our capability but it's gotten even more difficult to put our arms around," Blanford had said about the company's ability to measure demand as it added new partners and sellers.

Green Mountain also blamed warm weather for cutting into sales of hot cocoa and cider during the quarter

INVENTORY SURGE

Green Mountain said inventory doubled to $602.1 million at the end of the quarter from a year earlier. This was in part due to rising coffee costs, but also because the company had more brewers on hand as it shipped fewer than expected, Chief Financial Officer Fran Rathke said. Inventory was 20-weeks.

When inventory days rise, "you're left with several possibilities - one is that it is overstated; another one is that the inventory management is not as good as it should be," Penn State University accounting professor Edward Ketz said.

Stifel Nicolaus analyst Mark Astrachan, who has been bearish on the stock for years, said Green Mountain would lose market share once its key K-Cup patents expire in September.

"We anticipate competition will pressure K-Cup pricing, increase promotional activity, and result in share loss for Green Mountain, negatively impacting the company's long-term earnings power," Astrachan said in a note to clients.

The fast-growing single-serve space is getting more crowded. Nestle SA (NESN.VX) has long been a competitor with its Nespresso machines, and Starbucks Corp (SBUX.O) has recently announced plans to sell its own single-serving machines, though it says it will still also sell its coffee though Keurig.

"Green Mountain seems like a classic case of a growth stock cooling off, where even though the growth is impressive it is far below what was expected," said Eric Hanson, president of Green Mountain shareholder Hanson & Doremus Investment Management.

Hanson said his firm had cut its holdings in the stock since Einhorn's allegations and would evaluate its investment again.

Green Mountain shares fell almost 48 percent to close at $25.87 on Nasdaq on Thursday, and hit its lowest point in almost two years. The stock had hit a lifetime high of $115.98 last September.

At its current share price, Green Mountain is worth $4.12 billion, down from a peak of more than $18 billion in September.

KeyBanc Capital Markets analyst Akshay Jagdale slashed his price target on the stock to $45 from $80, but kept his "buy" rating.

"As a result of the disappointing results, management's credibility is yet again under question," Jagdale said. "We believe that GMCR's growth story is still largely intact, but believe that the stock's valuation reflects otherwise."

According to Data Explorers, as of Wednesday, 62.6 percent of the Green Mountain shares available to be shorted are currently being done so, compared with a market average of about 16 percent.

(Additional reporting by Nanette Byrnes and Jennifer Ablan; Editing by Ted Kerr, Tim Dobbyn and Leslie Gevirtz)

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