entitled, U.S. Regulators to Warn Against Payday-Style Loans:

 

Federal regulators are preparing to crack down on short-term payday loans and similar products offered by banks after concluding they trap consumers into taking on debt that they can’t repay.

 

The Office of the Comptroller of the Currency and Federal Deposit Insurance Corp., in an effort to prevent so-called direct deposit advance loans, plan to warn banks against offering such products and erect hurdles for those that continue doing so, said people familiar with the matter.

 

The regulators plan to issue guidance mandating that banks evaluate consumers’ ability to repay such loans and limit how often they can make repeated loans to the same customer.

 

Meanwhile, the Consumer Financial Protection Bureau said it also intends to throw up roadblocks to payday loans, suggesting it could limit the number of consecutive loans to discourage consumers from taking on too much debt.

 

The CFPB, in a report to be released Wednesday, said it expects to use its authority to provide consumer protections to loans issued by nonbank lenders.

 

Dennis Shaul, chief executive of the Community Financial Services Association of America, which represents payday lenders, said his industry would “work with the CFPB to ensure payday loans are a safe, reliable option for the millions of consumers who need access” to short-term loans.

 

The crackdown comes amid criticism of short-term loans that are intended to help consumers through a financial rough patch but can quickly trap them in a cycle of debt, in which they need to take out subsequent loans to pay debts they have already incurred.

 

What’s the proper price for the stock of a highly levered financial company doing unsecured lending to subprime customers, facing potentially crippling regulatory action? I’d argue that 1x book value would be generous, especially in light of questionable loss reserves. Yet World’s shares trade at 3x book value, so I think the stock has at least 67% downside – and I wouldn’t rule out a zero. Simply put, this business should not exist.

 

In late July the company finally issued its 10K, which was delayed, and dropped these bombs (which are most definitely NOT boilerplate):

 

Management’s assessment of the Company’s internal control over financial reporting identified a material weakness related to the documentation of the establishment and assumptions underlying the adequacy of the allowance for loan losses and the documentation of management’s assessment of renewals that may be considered loan modifications as of March 31, 2013…

 

…The material weakness resulted from the aggregation of the following deficiencies:

•         The Company did not have a documented policy that addressed the establishment of the allowance for loan losses, including the assumptions underlying the allowance for loan losses and how management would review and conclude on the appropriateness of the allowance for loan losses; and

•         The Company did not have a control to assess whether the accounting treatment of renewals was in accordance with U.S. generally accepted accounting principles and what impact, if any, renewals would have on the estimate of the allowance for loan losses

 

So I guess it shouldn’t be surprising that WRLD released the news that its CFO, Kelly Malson, “retired” after the close today, which was obviously very sudden given that the company hasn’t even begun a search for a new CFO and Malson didn’t leave for another job:

World Acceptance Corporation Announces Planned Retirement of Chief Financial Officer

Press Release: World Acceptance Corporation – 46 minutes ago

 

GREENVILLE, S.C.–(BUSINESS WIRE)–World Acceptance Corporation (NASDAQ: WRLD) today announced that Kelly M. Malson plans to retire from her position as Senior Vice President and Chief Financial Officer of the Company. The Company will initiate a search for a new CFO, and the exact timing of Ms. Malson’s departure will depend on the Company’s process for finding a successor. Malson’s eight-year tenure with the Company began in 2005, and she has served as the Company’s Chief Financial Officer of the since March 2006.

“I want to thank Kelly for her service and many valuable contributions to our Company as CFO and a key member of our senior management team,” said Sandy McLean, the Company’s Chairman and Chief Executive Officer. “Her leadership and dedication have been critical to our success and the development of our finance function and team. Although we are sorry to see her leave, we respect Kelly’s decision and desire to pursue other objectives and wish her all the best in those endeavors.”

“I am honored to be a part of the World Acceptance team and to have had the opportunity to work together with so many talented and dedicated colleagues to grow our Company and position it for continued success,” said Malson. “I look forward to supporting the Company in a smooth transition and thereafter pursuing other life objectives.”

(Note that the Malson is also the Chair of the audit committee of CONN, another HIGHLY questionable company…)

 

3) Now let’s turn to Green Mountain (GMCR). Jesse Eisinger, one of the best investigative journalists around, raises some very good questions about the company and its accounting in his column today, which begins:

Green Mountain Coffee Roasters’ first-ever investor day is Tuesday, and the company is flying high.

The stock price of the company, which sells coffee machines under the Keurig brand and the little K-Cups that go in them, has soared more than 260 percent in the last year.

Despite persistent questions, most of Wall Street remains resolutely bullish on Green Mountain, which has a market value of $12 billion.

In 2010, the company disclosed it was being investigated by the Securities and Exchange Commission. In 2011, the hedge fund manager David Einhorn, who is betting against Green Mountain’s stock price, delivered a highly critical 110-slide speech at an investor conference, raising questions about the company’s future prospects and, more seriously, its bookkeeping. He followed up a year later with another one.

A class-action lawsuit, which was dismissed, quoted anonymous former employees about suspicious activities. Green Mountain has said it conducted an internal investigation that cleared the company.

Green Mountain operates on a razor/razor blade model — selling brewing machines but making its real money on the K-Cups. It used to disclose exactly how many K-Cups it sold but stopped doing so in 2010. Instead, it tells investors the year-over-year percentage growth. Wall Street has dutifully plugged numbers in to estimate the unit sales.

Last year, Green Mountain faced expirations of the patents that covered its brewing system. Wall Street has been monitoring whether Green Mountain will lose market share to new private-label knockoffs. And indeed, a recent Barron’s article suggested that it was losing share faster than expected.

A recent disclosure from the company’s new chief executive, Brian Kelley, has revived the questions about sales, as do on-the-ground accounts I have received from former factory and warehouse workers.

Because Green Mountain’s investor day will give analysts and shareholders unusual access to company executives, it seems like an opportunity to ask them some hard questions.

Here are a few from me.

? Just how many K-Cups has Green Mountain sold year-to-date and is it less than the Street understands?…

? How wide is the gap between how many K-Cups the company says it has sold and how many have ended up in customer’s hands? And why?…

? What explains the unusual movements of Green Mountain inventory described by some former company workers and associates?…

? What is happening with the S.E.C.’s investigation of Green Mountain, which the company has said involves its accounting practices?…

Let’s take a closer look at K-Cups, where the math just doesn’t make sense – and the company isn’t helping with an explanation. At the analyst day today (see webcast and 188-slide presentation at: http://investor.gmcr.com/index.cfm), the company was asked to reconcile this estimate of K-Cups (since, as Eisinger notes, the company stopped disclosing K-Cup sales in 2010): there are 16 million brewers, GMCR claims usage (an “attachment rate”) of 1.4 K-Cups per day x 365 days/year, which results in sales of 8.2 billion K-Cups per year (which doesn’t even count maybe 15-20% additional consumption away from home). But GMCR isn’t selling anything close to this number of K-Cups, per both analysts and the company (see Eisinger’s article below), so what gives? My answer: usage is declining. It makes sense that the people who bought brewers first are likely to be the heaviest users, so the company and analysts should be modeling declining attachment rates – but of course they’re not.

 

When asked about this at the analyst day today, three people from management started speaking at the same time and eventually the CEO said “We don’t do straight math.” Now that’s a quote for the ages!

 

An even greater concern is that 700-900 MILLION K-Cups can’t be accounted for. Eisinger writes:

That’s a far cry from 5.6 billion. There seems to be a gap in the United States of about 900 million K-Cups.

What’s going on?

Mr. Brandt said the company declined to give its overall sales volume, but said the IRI number that I was furnished with was too low. He said a company analysis indicated