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Greenberg: Has Green Mountain’s Growth Story Stopped Percolating?

Shares of Green Mountain Coffee, which makes those K-Cup coffee pods, have taken a hit after the company’s disclosure yesterday that it overstated revenue last quarter related to an inter-company markup in its inventory balance.

AP

It also said that it had received an inquiry from the SEC into certain revenue recognition practices and its relationship with a fulfillment vendor.

The company snuck out the disclosure in an 8-K filing with the SEC without a formal press release. In its disclosure, Green Mountain claimed the revenue overstatement was an “error” and “immaterial.”

However, as immaterial as it may appear, the “error” added 3 cents to earnings per share of the company, which beat estimates by a penny.

As for the SEC investigation: The fulfillment vendor, as disclosed in the company’s 10-K, appears to be M-Block & Sons. Green Mountain says, “We sell a significant number of brewer and K-Cups to this third party fulfillment company for re-sale to certain vendors.” (My question: What’s the difference, given this definition, between a fulfillment vendor and a distributor?)

It’s unclear what the SEC is probing, but according to Green Mountain’s revenue recognition disclosure, “revenue from wholesale and consumer direct sales is recognized upon product delivery, and in some cases upon product shipment.” (My question: Which is it? And what allows for one over the other. Inquiring investors should ask. And For what it’s worth: Revenue recognized at shipment is generally considered a more aggressive form of revenue recognition.)

Green Mountain has not yet responded to my inquiry.

All of this is just part of what bears claim has been an evolving story at Green Mountain, which has been engaged in one of those bull-bear tug-of-wars for years. The bulls clearly have won, but there have been a variety of issues that have raised concerns.

Among them:

  • The company’s active acquisition spree of licensees, which appeared to peak earlier this month with the announced acquisition of Van Houtte, a Canadian coffee maker — adding more than $1 billion to its debt. In addition, two key K-Cup patents expire in 2012. Analysts at Stifel Nicoulas said they believed Van Houtte’s license is transferable, which would allow a third party to manufacture their own branded K-Cups without needing Green Mountain’s permission. “We believe the acquisition of Van Houtte and other royalty partners is an expensive way to postpone competition but not prevent its eventual existence,” the analysts wrote.
  • Recent 20% price cutting on various K-Cups and brewers at Target, a large distributor of Green Mountain products.
  • A quarter ago the company established 2011 guidance that would add more revenue that Green Mountain generated in all of 2008 and almost as much as 2009; some skeptics believe this implies a rate of brewer and K-Cup sales that are unrealistic.

My take: SEC inquiries make for good headlines, but this one — regarding revenue recognition practices with a vendor — bear’s watching. Anytime revenue recognition becomes an issue at a company that has been posting stratospheric growth, it’s a red flag.

Further disconcerting: Claiming the “error” is “immaterial” when it would have likely caused the company’s earnings to miss estimates.

In this meet-or-beat quarterly estimates world, even if the dollars may appear relatively small, every penny suddenly becomes material.


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