What's Wrong With Green Mountain Coffee: A Primer

| About: Keurig Green (GMCR)
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Today I bring some worthwhile reading matter - for anyone, that is, who wants to get a handle on that $8-billion-market-cap hill of beans, Green Mountain Coffee Roasters (NASDAQ:GMCR).

If you're short, long, like drinking their coffee or are are a securities fraud aficionado, as I am, Dan M. Horowitz vs. Green Mountain Coffee Roasters, filed in the U.S. District Court in the lovely rural vastnesses of Vermont, will definitely be your cup of tea.

OK, I know, class action suits are no big deal. They're a dime a dozen (or at least used to be, until Congress made them harder to file). But in mulling the comments to my last offering on GMCR, it occurred to me that people seem a bit confused on the subject.

Some of you good people still are under the impression that this is a great company, just sorely misunderstood. Some pointed out that it is a major employer in Vermont, one of those "job creators" the Republican candidates for president keep talking about. Others violently disagree with my negative assessment of their coffee. (More on that later.)

Well, my friends, my advice to you is to wake up and smell the coffee.

Read the lawsuit. Then read a filing that the plaintiffs in the Green Mountain class action filed in July. Read them together, and I think you'll get a pretty solid explanation of what's wrong with the company. They were sent to me by someone who's been following GMCR, and I thought that I would generously share them with y'all.

The complaint is here, and the subsequent legal brief is here.

The heart of the suit is legalese, but I think it is worth reprinting here:

Prior to and during the Class Period, Defendants issued numerous statements and filed reports with the SEC regarding the Company's then-current financial performance and future earnings. These statements were materially false and misleading because Defendants knew, but failed to disclose that:

(i) the Company had improperly recorded revenue on shipments of product to its primary fulfillment vendor, MBlock;

(ii) the Company improperly overstated its royalty income;

(iii) the Company improperly understated customer incentive and marketing related expenses;

(iv) the Company improperly accounted for inter-company transactions causing inventory and earnings to be overstated;

(v) the Company publicly disseminated materially misstated financial statements that were presented in violation of Generally Accepted Accounting Principles ("GAAP");


(vi) despite Defendants' attestations to the contrary, GMCR operated with material weaknesses in its system of internal control over financial reporting.

The rest, as a famous religious scholar once said in a different context, is just commentary.

The class action suit goes on quite a bit, in great detail, to indicate just what's not kosher about this company. It's all there: the restatements, top execs unloading stock just before announcement of an SEC inquiry...

What distinguishes this lawsuit from a lot of class actions is the breadth of its details. Note the games GMCR allegedly played with royalty income, described on pages 13 and 14. But it gets better. At times, the suit reads like an indictment, replete with references to informants - "confidential witnesses," referred to in indictment-ese as "CW"s.

One of the juiciest tidbits was summed up in the July legal brief as follows:

For at least the past ten months, Defendant Green Mountain Coffee Roasters, Inc. ("GMCR" or the "Company") has been under the cloud of an investigation by the Securities and Exchange Commission ("SEC") concerning aggressive revenue recognition practices - suggested by some to be a form of earnings management - arising from GMCR's relationship with its primary fulfillment company, M. Block & Sons ("MBlock").

Although the SEC investigation has not yet concluded or its findings been made public, witnesses have provided Plaintiffs with alarming details of the Company's accounting improprieties and reckless conduct and how, before the Class Period, these facts were known to GMCR executives. For example, one witness explained that GMCR used "sales" to MBlock to manipulate the Company's financial reporting. Indeed, shortly before the end of the Company's financial quarter ended December 26, 2009, GMCR sent a 150-truckload shipment of product to MBlock for which no documentation exists to evidence that the shipment was actually made in response to any customer orders. Since GMCR recorded revenue for these types of deliveries upon shipment, GMCR was able to report millions of dollars in revenue for this "transaction." This witness indicated that senior officers, including VP of Operations, Jonathan Wettstein ("Wettstein") (who made regular reports to Defendant Lawrence J. Blanford ("Blanford")), as well as SCBU President R. Scott McCreary ("McCreary") and VP of Finance, Tina Bissonette ("Bissonette") were well aware of the suspicious shipment.

Now, I must immediately point out these are just allegations - and anonymous ones at that - so let's not jump to conclusions about any of this. Also, the company is vigorously fighting this suit. Still, what this indicates to me is that the company is in for quite a fight, and not just from this particular plaintiff. I think it's reasonable to assume that this and other "CWs" are talking to the SEC as well. So stay tuned.

One thing I have to address, because I think it is an important issue, is the taste of GMCR's coffee. Taste is a subjective thing. Lots of people really like their coffee. Well, I have a suggestion to all you GMCR fans. Go down to the local Wal-Mart and buy a $30 Mr. Coffee automatic drip coffee maker. I find that brand to be at least as good as the high-priced ones. Then, go to any mail-order house that specializes in high-end coffee.

My favorite coffee roaster is Porto Rico Importing in Greenwich Village, where I buy all my coffee. Peter's Blend, my fave roast, goes for $8.99 a pound. For those of you who live outside the New York metro area, five pounds of this coffee comes to $55, or $11 a pound, including shipping. (They have other outstanding blends on sale at $7.99, by the way. Check 'em out!)

Green Mountain's Fair Trade Rain Forest Nut coffee (which I've just picked at random; I have no idea how good it is) costs $9.49 for a twelve-ounce bag. That's $12.65 per pound, which makes its base price over one-third more than the price of outstanding, top-of-the-line coffee at one of New York's premiere coffee roasters.

In fact, if I order five bags, it actually costs me more per pound to order Peter's Blend from Porto Rico Importing, by mail, than it does to walk into a store and buy Green Mountain, assuming the website price is an approximation of the in-store price, as I believe it is.

If I were to order this Green Mountain coffee blend by mail, six bags would come to $56.37, including shipping and a 15% discount that was automatically put there for some reason, but not including tax. (Probably zero, as coffee is not taxed where I live.) And for that, a buck or so more than Porto Rico Importing, I get eight ounces less coffee.

It's like I say, friends: Wake up and smell the coffee.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.