Why Green Mountain Shares Crashed Today

Shares of Green Mountain Coffee Roasters (Nasdaq: GMCR  ) took a brutal hit in after-hours trading today, falling more than 40% to less than $30 per share. Only three months ago, shares were trading around $70. Eight months ago, north of $100.

What's to blame for the precipitous fall? Over the past eight months, a variety of factors, but today we found out that management severely overestimated K-Cup sales for the second quarter. During the company's earnings call this afternoon, management seemed almost baffled by the shortfall, leaving analysts and investors even more confused.

Executives blamed unseasonably warm weather, which could have affected hot cocoa and hot apple cider sales. They also admitted they were looking into "consumption pattern changes" and "channel shifts" as potential culprits as well. At one point, when trying to explain the forecast miss, the CEO noted, "We're still trying to really understand."

What does seem clear is that investors can expect less of a caffeine boost for revenues this year. The company laid out forecasts for revenue growth of 45%-50% for fiscal 2012, a significant notch down from the 60%-65% previously forecasted.

It's almost impossible to view these estimates as a coffee mug half-full. After all, the general lack of clarity on the earnings call speaks to broader trends at the company. The company's inventory accounting practices have been less than transparent in the past, and the K-Cup sales shortfall only increased the inventory on hand for the quarter, thereby squeezing profit margins more than 4%.

Still, did Green Mountain's shares deserve the sudden sell-off? After all, the news could be worse, right? At least Green Mountain's CEO wasn't accused of running a commodities hedge fund and betting on coffee futures. Sound familiar? In probably the most interesting story of the day, Reuters released a report indicating that Chesapeake Energy (NYSE: CHK  ) CEO Aubrey McClendon was running an under-the-radar $200 million commodities hedge fund, exhibiting questionable leadership decisions at a time of low shareholder confidence.

So perhaps the news could be worse for this rule-breaking company. At one point or another, every company hits a speed bump. Retooling the business will be critical to compete with the likes of Starbucks (Nasdaq: SBUX  ) in such a crowded space. Starbucks and Green Mountain have entered into an alliance to sell K-Cups, but the world's biggest barista also stands as a viable competitor. Investors should keep an eye on this relationship. In addition, another rule-breaking company we think you should keep your eye on is revealed in our free special report, "Discover the Next Rule-Breaking Multibagger." It's available for only a limited time.

Isaac Pino owns no shares in any of the companies mentioned in this article. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Green Mountain Coffee Roasters, Starbucks, and Chesapeake Energy, creating a lurking gator position in Green Mountain Coffee, and writing covered calls on Starbucks. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On May 02, 2012, at 8:30 PM, GaryBushwacher wrote:

    i'd say one of the reasons for the precipitous fall, was MF's unabashed pumping of the stock, which drove it up to a level it shouldn't have been in the first place.

  • Report this Comment On May 02, 2012, at 8:40 PM, papsrus wrote:

    "... management severely underestimated K-Cup sales for the second quarter."

    You mean "overestimated," yes?

    This one seems too dangerous: from questions about inventory accounting to management's seeming inability to grasp the reasons for the current sales shortfall to Whitney Tilson, everything about it seems toxic at this point.

    And, the product isn't even that great (IMO).

    Paps

  • Report this Comment On May 02, 2012, at 9:10 PM, ETFsRule wrote:

    "...today we found out that management severely underestimated K-Cup sales for the second quarter."

    I think you mean they previously overestimated their K-Cup sales, causing them to cut their forecast.

  • Report this Comment On May 03, 2012, at 12:06 AM, naughtyguy wrote:

    The managers were sooo surprised they sold stock last month... http://www.bloomberg.com/article/2012-04-02/aborYoDOZ9L8.htm...

  • Report this Comment On May 05, 2012, at 1:57 PM, TMFBoomer wrote:

    @papsrus

    I did in fact mean "overestimated" and made the appropriate correction above. Thanks for pointing this out.

    Isaac

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