Green Mountain Coffee Roasters restates earnings. Can we trust its Social Responsibility Report ?

Green Mountain Coffee Roasters announced that it restated its previous financials after the close on Friday, 11/19/2010. 

On first glance, I was like everyone is, very excited by the resolution of this accounting problem.  The shares are soaring 10% in after-hours trading;  just $5 below their all-time high of $38.  Not too shabby for a high P/E company.

However, on closer inspection, the accounting issues may actually be a bigger can of worms.  Press Release is troubling because:

  1. There were several restatements (albeit just a few pennies per share)
  2. These restatements were made over several quarters (and years)
  3. Worse of all,  they don’t even cover GMCR’s fullfillment vendor, M.Block & Sons

                                      
Like Yogi Berra said, “it ain’t over ’till its over.”  The SEC investigation remains ongoing, though the company indicates its own internal investigation is “nearly complete” implying the SEC doesn’t have an issue w/ GMCR’s accounting w/  Block & Sons.  What is readily apparent though, – – this company’s got some major internal-control issues.  This is surprising for a company that is so Socially Responsible and into “ESG“.  Can we trust its Social Responsibility report ? link to GMCR’s CSR page

However, a Moody’s analyst I spoke w/ a few weeks ago, mentioned that the key issue was likely with M. Block & Sons.  So something’s not making sense here.

Green Mountain Coffee Roasters – update on this leading SRI

There was a takeover rumor on Green Mountain Coffee Roasters (GMCR). 
I’ve been noticing this frequently these days, especially for stocks that have taken big dips (such as Adobe’s rumor of a link w/ Microsoft).   This is a background from their Website, Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) is recognized as a leader in the specialty coffee industry for its award-winning coffees, innovative brewing technology and socially responsible business practices. GMCR maintains two business units: the Specialty Coffee Business Unit, which includes the Green Mountain Coffee® and Tully’s Coffee® brands, and the Keurig Business Unit. The Company employs a combined total of over 1,400 employees.

believe these are unfounded, and appear to be manipulation on the part of some wise-guy investors.   The acquirer is rumored to be Nestle who’s oozing to expand into the North American market.  My question is, Why would Nestle buy GMCR in the middle of an SEC investigation ?  Just makes no sense.

Also, there was a great little WSJ article on the coffee industry, particularly the segment which GMCR is focused on (of course, those little pod one-shots.  aka “Single Serve Coffee”).  During a lackluster market for coffee, single-serve growth has been phenomenal, doubling to $176.8MM over the last TTM ended 9/5/10.  However, note how small this market is !  Even GMCR needs to acquire companies to perk-up its business.

Consequently, an acquisition of GMCR would be too small for Nestle.  Nestle is a food company with over $100Bn in revenues (based on a recently released report, translated into USD from Swiss francs).  It’s Nespresso business, which is similar to GMCR’s Keurig line, has annualized revenues of nearly $3Bn, so an acquisition of GMCR would not make sense at this point as it would be too small.  For comparison, GMCR’s revenues annualize to over $1.2Bn, but, but, but, this is acquisition-related (and not all Keurig based revenue).  Also note from GMCR’s 10Q that there are large amounts of inter-company revenues, so I’m not confident in that, 87% of revenues are really Keurig-related, as the company claims. Also note that LaVazza now has a 7% ownership stake in GMCR,  likely turning-off any potential buyers.

Disclosure:  the author has a small LONG position, having sold most of his shares over the last year.