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Tomorrow morning, Green Mountain Coffee Roasters (Nasdaq: GMCR ) investors are going to need more than a cup o' joe to perk them up for the day. Shares are down more than 40% in after-hours trading, and the future is looking grim. Did David Einhorn come back to deliver another sucker punch? Nope -- this one is Green Mountain's own doing, as it appears the company grossly overestimated K-Cup and Keurig device sales for the second quarter.
Whitney Tilson did jump in for a few quick jabs, though, and even compared the company to famed Wall Street darling-turned-whipping boy Krispy Kreme Doughnuts (NYSE: KKD ) , which fell from about $50 a share to $5. I admit the stories rhyme a bit, and there's even some industry overlap.
The company slashed full-year earnings estimates on the realization of softer sales. What's even less encouraging, though, is that it can't seem to figure out why. As the CEO put it, "We're still trying to really understand." The company did blame unseasonably warm weather for depressing sales, but that seems like a cop-out. The company managed to grow fiscal third-quarter sales over the first and second fiscal quarters last year, even though the third quarter includes warmer months, and the first and second quarter were extremely cold last year, with record low temperatures and snowfall.
The culprit I do buy is the "consumption pattern changes" the company cited. This, however, should come as no surprise, considering Einhorn blew the doors off this one months ago, when he modeled the painful decline in K-Cup consumption per individual after the initial purchase of consumers' Keurig devices.
For those who were looking to the Vue as the knight in shining armor for Green Mountain's patent-expiration woes, don't hold your breath. Green Mountain management identified sales of the device as "nominal." Ouch. The company doesn't expect device sales to be material this year, but given its whiff on estimates this quarter, and the fact that consumers will have very little reason to switch to a new device, I'm going to assume "this year" means "never."
Coffee Holding Company (Nasdaq: JVA ) seems to be a victim of the company it keeps, as shares are down about 9% after hours as well. Considering that Green Mountain Coffee Roasters is its biggest customer, and that Green Mountain's inventory spiked 100%, it's fair to assume it may be ordering up less coffee in the future. That's too bad, since prices recently dropped from lofty levels.
So, is it dead?
I don't forecast a total implosion and crash to $0 for Green Mountain Coffee Roasters. After all, its revenue is still growing like wildfire. K-Cup refills were up 60% this quarter, too. The problem is, that's about half of last quarter's figure. Given that the company overestimated sales for its product, and that it has a health care-esque patent cliff looming, I would say it isn't done falling.
No, that doesn't meant its dead, per se. Green Mountain still has distribution agreements in place with all the right coffee slingers, including Starbucks (Nasdaq: SBUX ) and Dunkin' Brands (Nasdaq: DNKN ) , which should bring in revenue past patent expiration. Once that's over, though, it's going to get really ugly.
I've tried to warn investors about Green Mountain for some time now, even calling out the unlikely success of its Vue device. Instead, I've steered investors toward my favorite pick, Starbucks. Since then, Starbucks has jumped 21% while Green Mountain has fallen 3.6%.
If you missed the first few buy and sell recs, though, don't worry, because there are more. And our chief investment officer and I agree that The Motley Fool's Top Stock for 2012 is one you don't have to worry about. It has growth in all the right places, with no fishy Green Mountain-like accounting shenanigans. You can read about it today, and don't worry: This special analyst report is 100% free.