Why Einhorn Is Still Shorting Green Mountain

Sometimes it seems like hedge fund managers aren't content unless they've rained on everybody else's parade. Before Green Mountain Coffee Roasters (NASDAQ: GMCR  ) reported 16% year-over-year revenue growth, and impressive annual sales of $4.4 billion in its Nov. 21 earnings release, David Einhorn of Greenlight Capital blasted the company, saying executives were scrambling to prove that "all is well in mudville ." Even as Green Mountain's shares soared on the good news and Einhorn's bulked-up short position winced as a result, does he have a point?

A trumpeting Einhorn
The root of David Einhorn's short thesis is simple. He believes the barrier for entry into Green Mountain's field is too low for the company to be a worthy investment. In short, it's too easy for companies to make their own K-Cup equivalent, especially now that Green Mountain's patent has expired on the product.

Many companies are putting that thesis to work- competitors like Treehouse Foods and even Whole Foods have worked on spinning off their own brand of K-Cup, gnawing away bit by bit at Green Mountain's market share in the process.

That's not all that bothers Einhorn. He also takes huge issue with Green Mountain's supposed inability to disclose exactly how many K-Cups it has sold. In his last letter to shareholders, Einhorn said a New York Times article reported a "large discrepancy" between the total K-Cups Green Mountain claims to have sold versus findings from tracking firm IRI. Einhorn believes that this activity could lead to Green Mountain "booking hundreds of millions of dollars of non-existent K-Cup sales." If that's true, then there might have a bigger ethical problem at hand- bad accounting practices.

Climb every green mountain
While Green Mountain has yet to directly address Einhorn's claims of faulty accounting, it plans to take on the issue of competitors storming its castle by converting "unlicensed players into licensed partners." Green Mountain's chief financial officer France Rathke stated on its conference call that some of the company's largest retailers had executed successful promotions over the quarter, which boosted consumer sell-through as a result. Green Mountain also has a would-be chief rival in its corner: Starbucks has shipped over 850 million K-Cup packs since beginning a partnership agreement in 2011.

CEO Brian Kelley also believes the next fiscal year will be a "game-changing" opportunity for Green Mountain, as the company expects to release its new portion pack platform, the Keurig 2.0. While staying relatively mum on the details, Kelly did say that unveiling the new product will help transform Green Mountain into a "hybrid of a technology company and beverage company."

Greenlight vs. Green Mountain
Einhorn might sound like a giant Debbie Downer in the face of Green Mountain's latest successful quarter, but he's not wrong to be concerned about potentially skewed bookkeeping practices. If Green Mountain isn't accurately documenting what's going out, that could become an issue later on, perhaps even with the SEC. Even though it'll take more than just a perturbed letter to hedge fund shareholders to turn this into an issue, Green Mountain still should be concerned about maintaining market share after the K-Cup patent expiration. It's a nice gesture of good will to want to work with every vendor that wants to make its own equivalents, but it certainly doesn't guarantee a 100% success rate. If Green Mountain can find a better way to rectify that situation, it could become a more reliable stock to watch. Until then, high sales or not, investors might want to proceed with caution.

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  • Report this Comment On December 16, 2013, at 5:47 PM, andy8546 wrote:

    The big question is how is the company continuing to spend $1.5B in buybacks if it is loosing market share and having faulty accounting as Einhorn put it? Also you forgot to mention that because of Einhorn and his short interest, Greenlight managed to push SEC to do an inquiry into Green Mountains accounting practices 2 years ago, with nothing action being taken by SEC.. So the only issue here is Einhorn/GreenLight capital is short GMCR shares and are desperately looking to make up rumors and publish articles like this to drive down the shares. Reminds me of Bill Ackman and his articles about how Herbalife is a pyramid scheme, and how he pushed the SEC to look into HLF's accounting practices..

  • Report this Comment On December 16, 2013, at 6:43 PM, Quarterdollar wrote:

    Do you mean DAVID Einhorn?

  • Report this Comment On December 17, 2013, at 8:40 AM, cmountz wrote:

    David Einhorn has been shorting GMCR

    I didnt read the rest of the article considering you lost all credibility in the first paragraph, Caroline.

  • Report this Comment On December 17, 2013, at 12:30 PM, michaelT2 wrote:

    So, what has Einhorn/Greelight paid you to publish this on GMCR? The SEC has ALREADY investigated Green Mountain and found what? Nothing. Einhorn is just trying to display his 'powers' and they're failing at best. Thus far he has done an expose on 4 companies: The first two tanked and stayed there. The third - Chipotle - tanked but rose back up to even higher heights where it is today. Green Mountain tanked but it's now on its way back up - just like Chipotle. If Einhorn doesn't do something, he loses most, if not all, credibility which is probably why every time GMCR rises up close to $80 a share one of these pseudo 'informative' articles hits the press. I won't be shocked or even surprised at all if in say 5 or 10 years we find the SEC prosecuting Greenlight for stock manipulation. Maybe he's not...but I wouldn't be surprised.

  • Report this Comment On December 18, 2013, at 10:03 AM, BagToter wrote:

    Hello Caroline,

    Thank you for your work. Unfortunately, you did report some false information. GMCR disclosed "exactly how many K-Cups it has sold" in their November 20th conference call. I have attached the actual quote below:

    "We’ve recently been asked to provide the total number of portion packs sold in our 2000 fiscal year. In fiscal year 2013, we sold 8.3 billion portion packs split nearly evenly by quarter with the first quarter a point or two higher than 25% and the third quarter a bit lower. On a 53-week comparison this is a 22% annual increase from 6.8 billion packs last year and on a 52-week comparison this is a 26% annual increase from 6.6 billion packs last year.

    We do not believe the portion pack unit number is material to understand the company’s business, because for example, pricing and input costs can vary greatly depending on the partner or the product. Therefore we continue to believe the most relevant information regarding our performance remained revenue dollars, revenue growth and unit growth, which we will continue to provide to you quarterly like the majority of our CPG peers."

    Hopefully this information is helpful to you.

    Kindest Regards,

    BagToter

  • Report this Comment On December 23, 2013, at 1:35 PM, MizzouTx wrote:

    The short thesis rests largely on two items that show they don't have a clue about the future of this niche. 1. Declining market share is a product of the increased market for single serve. If a market doubles in total volume and you lose 10% of market share, you STILL have a 40% increase in sales. 2. Teh entry of more brands in the market raises awareness of single serve convenience, encourages price competitiion that makes the niche more affordable for more consumers and fuels the niche expansion. They really got it wrong. This niche is more comparable to the 1985 market in PCZs...it's there, people are hearing about it and experiencing it, but we have yet to see the market expansion that is yet to come. As consumer sentiment on overall economic conditions remains high, this "non necessity" niche is well positioned for expansion and GMCR will benefit.

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