Green Mountain Coffee Roasters (NASDAQ:GMCR) manages its operations in three separate segments, Specialty Coffee business unit ("SCBU"), Keurig business unit ("KBU"), and the Canadian business unit ("CBU").
The Canadian business ("CBU") is easiest to decipher (mostly). It includes all of GMCR's Canadian operations except for Timothy's which is Canadian but was included in SCBU prior to fiscal 2012. It also included Filterfresh which was American and was subsequently sold to Aramark.
SCBU is the most profitable business unit and is responsible for sourcing, producing, and selling GMCR's drinks product line-up (coffee, tea, cocoa, juices, etc) in all formats to all customers, both wholesale and direct. The segment also sells Keurig® brewers to supermarkets (duplicating KBU) and consumers. Only some of SCBU's sales are fulfilled by M. Block & Sons.
The KBU sells both brewers and drinks products. The drinks products are purchased from the SCBU and CBU segments. Keurig® brewers are produced and sold entirely within the segment, except for the ones SCBU sells. Products are mostly sold to wholesalers and distributors, except for some sales directly to consumers (duplicating SCBU). KBU also earns royalty income whenever the other two segments, SCBU and CBU, sell any K-Cup® packs. All sales by KBU are fulfilled by M. Block & Sons.
If you are having trouble telling if there is any substantive economic difference between the two non Canadian units, you're not alone. In any case, the motley collection of product sales that is SCBU is Green Mountain's most profitable unit on a GAAP basis according the financial statements GMCR files with the SEC.
The table below shows segment operating profit (defined by GMCR as income before taxes) for FY2010, FY2011, and the first nine months of FY2012.
SCBU is by far the most profitable segment, reporting income almost double the next most profitable segment.
But things take a turn for the worse when you look at the capital expenditures of each segment. Almost all of the income for SCBU in FY2010 and in FY2012 year to date has been wiped out by capital expenses (property additions) as the table below shows.
For the 33 months going back to the beginning of FY2010 SCBU has reported operating profit totaling $671M but all but $80M of that has been wiped away by capital expenditures. FY2012 is particularly bad as SCBU shows only $374,000 in income after accounting for capital expenditures.
The SCBU business unit consumes almost every dollar in profit it reports. Put simply, based on the numbers GMCR reports, there is no economic case for Green Mountain to continue to operate SCBU.
The company claims the cap ex spending is support future growth, but the future growth never seems to come. For both the previous fiscal year and the first three quarters of this fiscal year capital expenditures for SCBU have far outpaced sales growth.
From fiscal 2010 to fiscal 2011 SCBU sales grew 67.64% but capital expenses grew 85.76%. This year, things are even more bizarre with sales basically flat and capital expenses increasing by almost 92%!
Just what is Green Mountain counting as capital expenses for SCBU and more importantly why are the continuing to do so when it is eating away all of the units profit? Management claims its to support increased sales but this is demonstrably false so far in fiscal 2012.
We suspect the SEC investigation may shed some light on just what Green Mountain is counting as capital expenses. Until then, invest cautiously.
Disclosure: I am short GMCR.