GMCR: Whitney Tilson’s Cerebrates his Victory Lap

The latest from Whitney Tilson (it was confirmed to me that Tilson was short GMCR before David Einhorn’s presentation).

I called into CNBC’s Fast Money after the close yesterday, commenting on Green Mountain, our largest short position by far, which plunged 39% today.  You can watch it here,  (starting at 5:37 to 14:06), and here’s a summary:


Although the company reported lower-than-expected quarterly results, hurt by weak sales, top hedge fund manager Whitney Tilson tells us something else may be behind the selling.

“The growth story looks like it was pumped up by shenanigans,” he says.

“There are many big questions here,” he says. But the biggest is probably that “inventories were up 356% year over year. And they don’t really provide a satisfactory explanation in the earnings release,” Tilson says.

”This smells to me like channel stuffing,” he says.  “It looks to me like they pulled a lot of demand forward last quarter, stuffed the channel. “

And he thinks the sell-off is a sign “that game has come crashing down. This company may be in real trouble,” he says.

Of course Tilson is talking his book, he’s short Green Mountain. (And he may add to his short – “I thought it was over valued at $30 on the way up,” he tells us.)

But it isn’t only Tilson who is skeptical of Green Mountain. Last month David Einhorn also raised questions about the company’s business model.

On the conference call Green Mountain said they’re confident there has been no misconduct and no wrong doing.

But that may not matter.

”If you’re a money manager, now you have to peel out of the stock just because it could be a problem for your portfolio,” says Dan Nathan.

Looking at the rest of the earnings release, Green Mountain reported fourth-quarter sales of $711.9 million. Analysts were looking for sales of $760.5 million, according to Thomson Reuters I/B/E/S.

Net income was $75.4 million, or 47 cents a share, compared with $27 million or 20 cents a share a year earlier. Adjusted profit was 47 cents a share, compared with the 48 cents that analysts were expecting on average.

However, there was a bright spot, the company forecast a profit for the holiday quarter that was largely above analysts’ estimates.

Note: in my rush to prepare, I made a silly math error that I repeated on air: I said inventories rose from $262 million to $672 million year over year (which is correct), but I incorrectly said this is a gain of 356% (it’s 156%).  My point remains the same, however: it still far exceeds revenue growth of 95%…


If you were at the Value Investing Congress, you could have shorted it three weeks ago in the mid-$70s (it closed that day at $69.80 and today at $40.89).


Is this now a buy, as we think Netflix was when it crashed the other day?  Here are the stock charts over the past three months:




Though the declines of the two stocks are eerily similar, we are hanging onto our GMCR short (though we may choose to take some profits).  We aren’t satisfied with the company’s explanation for its out-of-control inventory and cap ex, we don’t believe the guidance, and we think the ongoing SEC investigation may still bear fruit.


2) Here’s what David Einhorn wrote about GMCR in his Q3 letter:

The quarterly letter is a little bit later than usual as we spent the window in which we

usually write the letter (the couple of weeks between the end of the quarter and the

beginning of earnings season) preparing a presentation for the Value Investing Congress.

This year, David presented the thesis behind our Green Mountain Coffee Roasters

(GMCR) short position.


After our presentation, one of the largest GMCR shareholders sent us a Keurig coffee

brewer and ten K-cup boxes of coffee straight from the warehouse. Not only did we

appreciate the gesture, it was nice of them to assist in our field research, as the majority of

the K-cups were too close to expiration to be sold through normal retail channels.


The PowerPoint slide-show that supported David’s speech has been widely disseminated,

and we believe that it is contributing to the conversation about GMCR. The reaction from

the press has been better than our previous experiences, as the attention has focused on the

merits of the argument (without the personal attacks that often follow these sorts of

presentations). We can’t say the same for the sell-side analysts.


KeyBanc Capital Markets’ analyst offered a more nuanced response than the title of their

report would suggest (“A New Credible Source, but the Same Old Short Thesis”), but

Mitchell Pinheiro of Janney Capital Markets wrote, “There is not a single argument that

Einhorn presented today that couldn’t have been made or wasn’t made a year ago when the

stock was at $30 per share.” We disagree. Much of our analysis is dedicated to things that

have happened in the last year.


For example, we haven’t seen others question whether GMCR has inflated its March 2011

quarterly results by burying operating expenses from the Van Houtte acquisition into

goodwill. Though aspects of the recent Starbucks deal with GMCR have been questioned

previously, we have not seen anyone dissect the economics of the deal. And while

consumers across the web have repeatedly pointed out the high cost of K-cups compared to

traditional alternatives, analysts seem to have ignored this. But we think two of the bigger

issues we raised are the accounting issues stemming from GMCR’s capital spending and

the relationship with the company’s key fulfillment partner, M. Block & Sons.


GMCR spent $350 million to expand its operations in 2011 and plans to spend twice that

in 2012. It costs about $20 million to create enough manufacturing capacity to roast and

package 1 billion K-cups a year. GMCR needs to expand capacity by a few billion K-cups

a year, which may explain perhaps $100 million of annual spending. So where did GMCR

spend the balance of the $350 million in 2011 and where does it plan to spend the balance

of $700 million in 2012? If it can’t be explained, it raises the question: where is the

money going?


The part of the presentation that has garnered substantial attention is the field research

section. Here, we reported on the results of recent interviews we conducted with former

workers of GMCR and M. Block & Sons, who offered consistent reports of recent apparent

misconduct. While most of the sell-side has largely ignored this topic, SunTrust Robinson

Humphrey (whose banking arm, along with Janney Capital Markets, has received

significant fees from underwriting GMCR offerings) came out with the following: “This is

not new ‘field research.’ Instead, it was lifted from a deposition in a year old shareholder

lawsuit.” The analyst, Bill Chappell told Forbes, “If you look, there’s no quote, there’s no

M. Block employee talking about 2010 or 2011. It all has to do with 2009, of which

they’ve since restated their numbers and scrubbed their numbers… It’s not new field

research. It’s all taken from a class action lawsuit that has publicly been out there for six

months. You’d have to ask him why he didn’t find anything new this year.” Mr. Chappell

didn’t ask us himself and apparently he didn’t look very hard because the presentation is

replete with quotes about 2011 and explains that our field research only began with what

we learned in the class action lawsuit.


It is perhaps GMCR’s non-response that has been most surprising. It has remained silent

since our presentation, citing a self-imposed, artificial ‘quiet period’ before it announces

earnings, which are scheduled to be released shortly. It will be interesting to see whether

and how management plans to address the serious questions we have raised.