It’s the Fraud, Stupid – Paying Lip Service to GMCR Earnings
May 2, 2012 2 Comments
Allow me to begin with a contentious claim – Green Mountain Coffee Roasters (”GMCR”) is unanalyzable as a fundamental long play, because it is really a story of fraud. It is unanalyzable until there are material restatements of its past financial statements and we see some heads roll. All the chatter about acquisitions, Starbucks K-cups, Dunkin Donut K-cups, the new Vue machine, coffee prices, etc. play second fiddle to the fraud that remains at the heart of this story.
With that said, I will pay lip service to today’s Q2 earnings release, with a few comments. GMCR’s reported earnings for the quarter will be a tougher one versus Q1 2012, as Q1 2012 fully reflected the Van Houtte numbers, whereas Q1 2011 did not. Q1 2012 therefore had that cushion, whereas there is no such cushion this quarter. Q1 earnings and cash position also benefited from a one time gain on sale of noncore assets. Finally, seasonality was favorable as the prior quarter has tended to be their best quarter in a predictable fashion. Of course, I for one do not trust their Q1 numbers at face value, per my introductory claim (see my CAPEX question below).
What was odd about last quarter’s conference call, is that the stock price drifted steadily higher during the Q&A, even as the Wall Street analysts actually sounded somewhat critical and disappointed with management’s responses. It was if the stock price, and those bidding it up to the high 60s, were not listening to the questions or answers, at all.
After taking the above-mentioned into account, and looking at historical quarterly trends, I believe there is a earnings surprise risk to the downside, relative to GMCR’s guidance. The risk to my view for the quarter is that the liars continue to lie and inflate their results (after all, why not? The worst that can happen is that they get fined, right? Retirement/trust fund is set for life. Only thieves who steal goods at Target go to jail). The problem for GMCR is that the risk of fudging their numbers is at, or very near a point of ‘saturation’. The negative earnings surprise risk only increases in the coming quarters.
What I Hope is Asked or Addressed in the Q&A:
(1) Cannibalization – SBUX/DNKN K-cup sales vs. GMCR-branded K-cup sales – Any cannibalization? Last quarter, Larry Blanford avoided answering the question, by saying ” it’s too soon to say.” My Translation: “‘Yes, we’re noticing cannibalization, but hoping it’ll go away.”
(2) CAPEX – How is it that your CAPEX 2012 guidance equals or exceeds your total CAPEX spending for the last 21 years…combined?
(3) Inventory – Inventory and cash flows. Sam Antar has written two posts recently on inventory (links below). His critics need to be aware that he’s trying to help would-be, or current longs from being suckered in by crooks. Since cash flow has been non-existent in their annual financials, it’s a wonder how anyone does a ”Discounted Cash Flow” valuation on GMCR. Show me the cash flow!
(4) Looming Threats – How do you co-exist with SBUX Verismo machine? Customers have noticed certain problems with the ‘Vue’ brewer; how are things proceeding in addressing those problems? Are you seeing reusable k-cup popularity eat away at margins? Please address the looming patent expirations.
‘’A positive (fudged) earnings report this week (or hope leading up to earnings) would be the perfect opportunity to unload.’’ – Me, before GMCR earnings last quarter.
I stand by my recommendation, with the following twist: For those willing to take on more risk, I would short into earnings, and short more into any strength post earnings.
Also, my next report is in the works. I’m aiming for a release before the end of the month.
Lord forbid someone dial in at 6:00 pm today and ask some tough, critical questions during the call, a la Herbalife yesterday.