Green Mountain: It's About the Inventories

NEW YORK (TheStreet) -- Green Mountain Coffee Roasters(GMCR) has seen its shares more than halved since short-seller David Einhorn posed the question of whether past sales were achieved by stuffing warehouses full of coffee. Wednesday's earnings miss didn't help matters.

Shares of Green Mountain, previously a darling of Wall Street after its stock rose the most of any company in 2009 and was up 250% at points in 2011, plunged over 39% in early trading Thursday to $41.12. That downward move came despite sales growth over 90% on a year-over-year basis, which the company announced in a Wednesday earnings release that fell short of Wall Street expectations.

But Green Mountain CEO Lawrence J. Blanford said the miss was "a result of a number of factors, including changes in wholesale customer ordering patterns in our grocery and club channels," in an earnings statement.

As analyst views diverge and the company pushes back against Einhorn's thesis, look at inventories for a read on the health of the K-Cup seller.

David Einhorn

Green Mountain fell short of Wall Street's consensus view. The stock's precipitous fall is beginning to make a presentation by Greenlight Capital's founder Einhorn of a short thesis at the Value Investing Congress on Oct. 17 quite prescient. Einhorn's presentation came close to accusing the company of accounting fraud as a result of recognizing sales aggressively and managing inventory in past quarters when insiders were selling some of their share holdings.

No charges or allegations of accounting fraud have been issued by any law enforcement or regulatory agency related to Green Mountain.

In an analyst call after earnings were announced and subsequent research notes, it's the company's rising levels of inventory and capital spending that are the focus of analysis and a growing divergence on the company's outlook.

On one hand, Waterbury, Vt.-based Green Mountain's revenue total of $711.9 million for the quarter was over 5% below the average $760.5 million revenue estimate of analysts polled by Thomson Reuters and its earnings per share of 47 cents also slightly missed projections. The company; however, reaffirmed 2012 earnings per diluted share expectations of up to $2.65 and overall saw a near doubling in revenue and tripling in profits in 2011.

To investors' concern about new sales patterns, Green Mountain said it ended fiscal 2011 with finished goods inventory of $273.3 million, a 126% jump from 2010. Overall inventory rose over 150% to $672.2 million. It also reported its accounts receivable increased 80% year over year in the latest quarter to $310.3 million -- signaling either a surge in demand or recognition of previous sales. Additionally, Green Mountain's capital spending more than doubled to $290 million in its spending on next generation K-Cup coffee packs and Keurig machines.