Green Mountain plunges as single-serve coffee growth slows

Wed May 9, 2012 1:58am EDT

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(Reuters) - Shares of Green Mountain Coffee Roasters Inc plunged more than 40 percent after the single-serve coffee company slashed its full-year sales outlook and warned that its scorching growth was beginning to cool off.

The sales warning adds more weight to the criticisms of short sellers like hedge fund manager David Einhorn, who questioned the company's growth prospects and accounting practices last year.

The maker of the popular one-cup Keurig brewers said sales of K-Cup coffee refills rose 59 percent in the second quarter, though this represented a sharp fall from the 115 percent growth seen in the previous quarter.

The company would take an even bigger hit from the slowdown as it has overestimated demand, said Howard Penney, managing director at investment firm Hedgeye Risk Management.

"They have been over-producing for a while. This quarter is just the beginning of the slowdown (in growth)."

In an interview with Reuters, Green Mountain CEO Lawrence Blanford agreed that K-Cup supply was currently more than demand and said the company was adjusting its production accordingly.

The company expects to ramp up production again in August to meet holiday season demand, Blanford added.

Green Mountain put some of the blame for the slowing sales growth on a warmer-than-expected U.S. winter that curbed demand for its hot cocoa and hot apple cider K-Cups.

"After several quarters of robust adoption, we now expect a more moderated growth trajectory going forward for both Keurig brewer and K-Cup pack sales," Blanford said in a statement.

Green Mountain has been one of the fastest-growing companies in recent years as acquisitions and patent wins helped the company take a lion's share in U.S. single-cup coffee.

But its stock has lost 74 percent of its value since touching a life-high of $115 last September, following Einhorn's allegations and the first signs of slowing sales.

Green Mountain has also been facing increasing competition as companies with more financial muscle like Starbucks Corp, Nestle SA and Wal-Mart Stores Inc seek a bigger pie of the fast-growing market.

The expiry of some K-Cup patents in September is also likely to attract competition from cheaper private label brands.

MARGIN PRESSURE

Green Mountain earns a majority of its profits from K-Cups, as it sells the Keurig brewers at cost, and a sharp deceleration in K-Cup sales growth will pressure the company's margins.

Gross margins in the second quarter declined to 35.4 percent from 37.5 percent in the year-ago period.

The company reported a second-quarter profit of $93.3 million, or 58 cents a share, compared with $65.8 million, or 44 cents a share, a year ago.

Net sales rose 37 percent to $885.1 million, but missed estimates of $971.7 million, according to Thomson Reuters I/B/E/S.

Green Mountain sees fiscal 2012 sales rising 45 percent to 50 percent, much lower than its previous forecast of a rise of 60 percent to 65 percent.

The company's shares were down $20.12 at $29.40 in extended trade.

(Reporting by Mihir Dalal in Bangalore; Editing by Supriya Kurane, Saumyadeb Chakrabarty)

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