Sometimes it seems like hedge fund managers aren't content unless they've rained on everybody else's parade. Before Green Mountain Coffee Roasters (GMCR.DL) 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.
