Green Mountain Game-Changer (GMCR)

Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) may have just seen a change on how investors are going to treat its growth story ahead.  The company’s latest SEC filing disclosed accounting and SEC issues that are going to be hard for holders to merely overlook.

Green Mountain has completed a sale of 8,566,649 shares to Luigi Lavazza for $250,000,000.  This was based on a deal already disclosed.  The rest of the data has NOT been previously disclosed and the data will likely add pressure.  The company noted that, in connection with its acquisition of Van Houtte, and the marketing of the associated $1.35 billion debt financing, it has an “adjustment correction”:

• management discovered an “immaterial accounting error relating to the margin percentage it had been using” to eliminate the inter-company markup in its K-Cup inventory balance residing at its Keurig business unit.

Management noted that it discovered that the gross margin percentage used to eliminate the inter-company markup resulted in a lower margin for the Keurig ending inventory balance effectively overstating consolidated inventory and understating cost of sales.  The accounting error arose during fiscal 2007 and analyzed the quantitative impact from that point forward to June 26, 2010.  Accounting errors, even small ones, are rarely viewed with a welcome wagon.  The fact that this has happened since 2007 is also going to possibly create some credibility issues and it would not be a shock if at least analysts say that more issues are coming (particularly if see the “next” issue).

As of June 26, 2010, there is a cumulative $7.6 million overstatement of pre-tax income. Net of tax, the cumulative error resulted in a $4.4 million overstatement of net income or a $0.03 cumulative impact on earnings per share.  This alone is not the end of the world, but the notion that it last for so long will be a concern and investors have been pre-conditioned to have trust issues in any company that makes disclosures of this nature.

The company and its audit committee of the board of directors have determined that the correction in the margin calculation represents a correction of an error in accordance with Accounting Standards Codification 250 Accounting Changes and Error Corrections.  The company also determined that the correction “was not material to the fiscal years and the respective quarters ended 2007, 2008 and 2009 and that the Company anticipates that the correction will not be material to fiscal year 2010 and the respective quarters of fiscal 2010.”  Green Mountain anticipates the cumulative amount of the accounting correction will be made this quarter as a result and it does not intend to provide further updates regarding the correction of this error or the Company’s results for fiscal year 2010 until its fiscal 2010 fourth quarter earnings release and conference call.  In short, investors will likely have to wait for information until the company wants to divulge it.

The other issue is an “SEC inquiry” disclosure.  Green Mountain said that the staff of the SEC’s Division of Enforcement informed the company on September 20, 2010 that it was conducting an inquiry and made a request for a voluntary production of documents and information.  The Company said that it believes the focus of the inquiry concerns certain revenue recognition practices and the company’s relationship with one of its fulfillment vendors.  It claims to be cooperating fully with the SEC staff’s inquiry.

Shares closed down 1.4% at $37.01 today after seeing a 52-week high of $37.97 early this morning after the open.  The bad news is that the 52-week high is now much further way and it gets worse in that investors hate anything about any accounting issues and hate to hear “SEC inquiry” news.  After all, it is not exactly like companies disclose that the government is there to offer a helping hand.

Shares are down more than 10% at $33.55 in the after-hours session.  The fact that Green Mountain has a 52-week low of $19.87 and that ‘pre-news Thomson Reuters estimates of $0.71 EPS for 2010’ give a current expected P/E ratio of 52 will only allow traders to keep pounding on this stock if they choose to do so.

The September 15, 2o10 short interest settlement date showed that some 6.288 million shares were listed in the short interest, down from 7.916 million shares at the end of August.  This is a name that short sellers have been in before and they have been run over each time.  It seems a safe assumption that those short sellers may try to renew their attack against the company based upon this news.

Some analysts will say that this event is not material  to the long-term story, while others will likely cut estimates and/or downgrade their targets or their official ratings.

JON C. OGG