I have written several articles questioning Green Mountain's (NASDAQ:GMCR) capital expenditures and future cap ex plans and asking if it might be overly aggressive in capitalizing its expenses. Green Mountain's management and their cheerleaders maintain that the increasing inefficiency of manufacturing operations is nothing to worry about, and that the company is just ramping up capacity to meet future demand (despite management slashing sales forecasts). They also maintain that GMCR is somehow unique, is transforming the coffee world, can't be compared to other businesses, and has its financials in perfectly normal form. In this article I will examine how GMCR compares to several competitors it has recently acquired.
Over the past few years Green Mountain has gone on an acquisition binge, buying Diedrich, Timothy's Coffee, Tully's, and Van Houtte and integrating their operations into Green Mountain (GMCR did dispose of Van Houtte's commercial service business). Diedrich and Van Houtte were publicly traded in the US and in Canada, respectively, so we can analyze how those two companies performed compared to GMCR. The following three tables show how Diedrich, Van Houtte and Green Mountain compare on three metrics: (1) revenue to net fixed assets, which shows how efficient the company is at using its property, plants, and equipment; (2) revenue to cap ex, which shows the ratio of revenue to capitalized expenses; and (3) inventory turnover.
For Van Houtte we excluded fixed assets and revenue related to the commercial coffee equipment servicing and rental business. For Diedrich and Van Houtte we used the fiscal year end net fixed asset balanceand inventory levels for our calculations. For Green Mountain we averaged the net fixed asset balance and inventory levels as reported at the end of each quarter across the entire fiscal year. For our 2012 estimates we used the high end of management's sales guidance and the low end of its capital expenditure guidance. We estimated net fixed asset levels by adding the balance of management's low end cap ex remaining to the current levels of net fixed assets. The difference in methodologies in computing the ratios across all three companies is biased towards making Green Mountain look more efficient.
We can see that Green Mountain acquired companies that had substantially more efficient manufacturing operations and much better inventory management. But GMCR was unable to realize any of the benefits upon integrating those companies. In 2011, Green Mountain sold $5.59 worth of product for every dollar in net fixed assets carried on the balance sheet, and it is projected to sell only $3.77 in 2012. Van Houtte averaged just over $6 in sales per dollar in net fixed assets while Diedrich's operations improved over the five years shown and reached $11.50 in sales per net fixed assets. Inventory turnover tells a similar story, with both Van Houtte and Diedrich having much higher inventory turnover ratios than Green Mountain.
How did Green Mountain end up taking the sales and manufacturing operations of Diedrich and Van Houtte and making them worse? Green Mountain's numbers should have improved after the acquisitions, as GMCR would be dealing with improving economies of scales and the superior manufacturing and inventory management systems of the acquired companies.
Especially curious is the inventory turnover issue. GMCR has always claimed that part of the inventory problem is related to trying to tie together various disparate systems. If that was the case, then wouldn't the ratio show improvement as Diedrich's and Van Houtte's old, more efficient systems remained in place?
Disclosure: I am short GMCR. As of the publication date, one or more of the following: Strubel Investment Management, our clients, our employees, and/or funds we advise are short GMCR and stand to realize significant gains in the event that the price of GMCR declines. Following the publication of this article, we intend to continue transacting in GMCR and we may be long, short, or neutral any time after the date of publication. We undertake no obligation to update or supplement this article or disclose changes in our position in GMCR securities.
Disclaimer: You should do your own research and due diligence before making any investment decision with respect to any of the securities mentioned herein. Nothing in the article should be construed as investment advice or an offer to buy or sell any security.