The relentless "Shoot First and Ask No Questions" campaign by the media continues against Green Mountain Coffee Roasters (GMCR). This week's effort consists of a Bloomberg story attacking stock sales by Chairman Robert Stiller--sales which took place four to six weeks ago but are suddenly deemed worthy of being the headline of the day. Once again, a writer's fingers fly over the keyboard to produce the latest sensational headline conjuring up implications of illegal insider trading activity, all the while ignoring important underlying facts. In this latest attack, the ignored facts necessary to put things in proper perspective include: past history with Starbucks (SBUX) and the omission of key events in the pertinent time frame; the failure to review all stock sales by the Chairman going back to January 1, 2011; and the failure to recognize the right of a very successful leader to sell a small portion of his holdings in the company that he has led for over 30 years.
The Bloomberg story in question focuses on Stiller's sale of one million shares of GMCR stock, which consisted of 500,000 shares on February 15, at $65.93 and 500,000 shares on February 24, at $66.68. The article implies Stiller had inside knowledge of the fact SBUX would issue a press release after hours on March 8, 2012, announcing a competing brewer to GMCR's Keurig brewers. First of all, I seriously doubt SBUX's Howard Shultz called Stiller and advised him "we are about to issue a press release stabbing you in the back - again." I say "again" because my previous article (Starbucks: Where is your Courtesy?), detailed the negotiating shenanigans by SBUX in early 2011, which preceded SBUX entering in a multi-year agreement with GMCR for GMCR to package and distribute SBUX coffee in GMCR's highly successful K-Cups. Starbucks' tactics at that time included, first, an internal SBUX memo being "leaked" stating there was no leader in the single serve field (even though Keurig had something like 85% of the single serve market in the U.S. at that time). Then, SBUX issued a press release stating it had just struck a deal with Courtesy Products to be in 500,000 hotel rooms in Courtesy brewers by the fall of 2011. This was followed up by SBUX spokespersons commenting to the media that SBUX would release its own single serve brewer in conjunction with Courtesy Products. Now, here we are today and SBUX has yet to have its coffee in one single hotel room with Courtesy, much less the 500,000 hotel rooms by fall 2011 as promised in Starbucks' own press release. Instead, mere weeks after all these negotiating shenanigans in the media, SBUX announced it entered into a multi-year agreement with GMCR for SBUX to be in K-Cups.
Fast forward to now, one year later, and here comes SBUX with sucker-punch number two aimed at GMCR. GMCR has just recently rolled out its up-scale second generation Vue brewer, and SBUX at the time of the roll out does not have a deal inked for GMCR to produce and distribute the new Vue packs containing SBUX coffee. So, SBUX suddenly on March 8, 2012, announces a new espresso brewer branded as the Verismo brewer. Interestingly, SBUX has no distribution network for this new brewer, and is partnering with privately held Krueger in Germany - which does not produce brewers and has only a miniscule U.S. presence. In fact, the alleged Verismo is actually a renamed brewer that is already on the market, and SBUX claims Krueger will bear all capex costs for the new brewers and the brewer capsules.
On the next trading day after this announcement, the price of GMCR stock plummeted $9.81, which is almost a 16 percent drop. Interestingly, in its press release, SBUX alleged the new brewer would not only make espresso, but "brewed" coffee - which would therefore put SBUX in head-to-head competition with the Keurig brewers. In the conference call announcing the new brewer, SBUX claimed it had been fully transparent all along with GMCR about this new brewer. However, GMCR immediately filed a regulation FD disclosure with the SEC, stating that SBUX only "recently" advised GMCR of the new espresso brewer, and SBUX told GMCR nothing in advance about the new brewer making brewed coffee in addition to espresso. Then, after this second round of negotiating shenanigans, mirroring those that occurred in Spring 2011, SBUX announces it has signed a deal with GMCR for SBUX coffee to be offered in the new Vue compatible packs.
So, viewed in correct perspective, what Stiller actually would have known at the time of his two February sales was that GMCR and SBUX were in negotiations on an imminent deal for SBUX to be offered in the new Vue packets. Stiller sold his stock before this announcement of good news, thereby avoiding any appearance of impropriety, and he simply could not have known that SBUX, as part of its negotiating strategy, was going to first issue a press release of "alleged" bad news of a competing brewer. In hindsight, Starbucks' second sucker-punch aimed at Green Mountain Coffee Roasters also ended up hitting Stiller too.
The next fact omitted by the media is to consider Stiller's sales in the context of all his sales over the last 15 months. In August 2011, Stiller filed notice of his intent to sell a total of two million shares. However, he only sold 518,000 shares at that time. Those sales were at a price of $107.43. If he had derogatory inside information, he obviously should have sold all 2 million shares back in August at $107. More importantly, if you tally all of Stiller's sales since January 1, 2011, he has sold a total of 2,065,904 shares for proceeds of $155,093,066, which is an average selling price of $75.07 per share. In this same time frame, GMCR has traded between $32 and $115, the midpoint of which is $73.50 - right there at Stiller's average selling price. If Stiller was illegally trading on inside information, one would expect him to have a much higher average selling price than the mid-point of the stock price over the same time frame.
Finally, unlike the media, one must consider not only how much stock was sold, but how much stock was retained. When viewed in isolation, selling one million shares of stock strikes one as being an enormously large sale. But, Stiller only reduced his stake in GMCR by 6.9% with this one million share sale. He still owns a staggering 13.4 million shares, or nearly 700 million dollars worth of GMCR stock at the current price of $52 dollars a share. Over the past 30-plus years, Stiller has diligently steered the GMCR ship from a small coffee house business to being one of many licensees of Keurig, to then being the owner of Keurig, and now to being the owner of all former licensees. The market capitalization of this entity, after over 30 years of work by Stiller, now exceeds 8 billion dollars, and GMCR is the largest private employer in the state of Vermont. Stiller is now almost 70-years old. So, given his age, his years of service, and his tremendous successful work on behalf of Green Mountain Coffee Roasters, its employees, and its shareholders, I have great difficulty finding any fault with his sale of such a small portion of his holdings. He did the work, he produced the results, and he certainly is entitled to reap a small fraction of the rewards.
This sale by Stiller stands in stark contrast to an actual illegal trade on real inside information - such as when GMCR critic David Einhorn got off a private conference call with company management at Punch Tavern Plc, and within minutes ordered liquidation of his fund's entire position in Punch - a position that was more than 13 percent of the company. That trade liquidation order, based on inside information, resulted in a record 11 million dollar fine by the British authorities. Einhorn, while claiming he is totally innocent, has said he is just going to pay the fine and move on. I guess there weren't any good English Barristers available who for just a million dollars or so retainer could represent an innocent person on appeal and get a wrongful fine of 11 million dollars reversed.
In concluding, I do note I certainly lack the stellar credentials of the GMCR bashers and short sellers. I have not been subject to a record 11 million dollar fine for insider trading like David Einhorn, and I am not a CNBC windbag critic of GMCR who feigns ignorance on the air regarding the well known upcoming Keurig-Lavazza espresso brewer. I am just observing the facts overlooked by the mainstream media.
Disclosure: I am long GMCR.