NEW YORK (TheStreet) -- Investors dumped shares of Green Mountain Coffee Roasters (GMCR) after the K-cup coffee and Keurig maker reported revenue that missed analysts' estimates. But that wasn't the most disturbing figure.
Revenue jumped 91% in the fiscal fourth quarter, well below management's guidance for a gain of 100% to 105%, raising concerns of the company's credibility.
David Einhorn of hedge fund Greenlight Capital originally brought into question the company's accounting practices, its relationship with key vendor M. Block and Sons, and the imminent expiration of the K-cup patent, a product used in its single-serve coffee machines.
CEO Lawrence Blanford said on the quarterly conference call that "though disappointing, we take the recent allegations of misconduct seriously." He added: "Our audit committee has reviewed the allegations, and we are confident there is no misconduct. There is no wrongdoing."
Since Einhorn announced his short position in the company, the stock has declined 27% (excluding today's massive drop). That's worse than any other coffee company. (Please see chart below.)
Green Mountain's disappointing revenue growth was the biggest concern for investors, not least because there's a
Securities and Exchange Commission
probe of its revenue-recognition practice. The company blamed the shortfall on a sudden change in wholesale customer ordering patterns. Yet Green Mountain said demand in that channel remained steady. If demand hasn't changed, why would orders change?
Inventories swelled by 156% from a year earlier, well above sales growth. Stifel Nicolaus analyst Mark Astrachan said that suggests shipments in recent quarters were provided ahead of the end-market's plan. In addition, he points out that the ordering changes occurred "in grocery and club channels. ... We find this disturbing as grocery and club channels are newer, less developed and should be faster growing than legacy retailers like
Bed Bath & Beyond
." Inventory at these bloated levels could become a problem if demand weakens.
A big ramp-up in capital spending was another concern of Einhorn's. In fiscal 2011, which just ended, capital expenditures more than doubled to $290 million because of increased spending on K-Cup and next-generation K-Cup coffee packaging. Plans to spend $630 million to $700 million in 2012 was a bit of an improvement from previous guidance, but still represents more than a quadrupling from this year. And that's faster than planned sales growth of 60% to 65%. As Einhorn put it, capital spending "is growing much faster than the business, when the business should be growing faster than spending."
That, of course, hurts the company's cash flow. In the fiscal year that just ended, operating cash flow was only $785,000, not even close to funding capital spending on its own. Green Mountain took on debt and issued new shares.
According to research by Stifel Nicolaus, after accounting for cash on hand and proceeds from the sale of Filterfresh, the U.S. office coffee business acquired with Van Houtte, Green Mountain would need to generate $480 million just to meet capital spending plans. That doesn't account for working capital needs, which include the funding of inventory growth. To support such growth, the company is going to have to raise capital.
Green Mountain, clearly, has to square some of the figures. As the situation is now, it's hard to imagine the stock price could move higher.
-- Written by Lindsey Bell from New York.
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