Green Mountain Coffee Roasters (“GMCR”) has long claimed tobea razor, razor blade businessin its10Ks, 10Qs, Investor Presentations,Conference Calls,etc.
“The Company sells the majority of Keurigsingle-cup brewers approximately at cost, or sometimes at a loss when factoring in the incremental costs related to sales, including fulfillment charges, returnsand warranty expense.”
–201110KBased on a recently releasedSECComment letterand other information,LST believes thateither:(A)GMCR’s business is misunderstood, its economics misrepresented; theclaimthat the companysells“brewers at cost”a la “razor, razor blade”iscompletely FALSE.In fact, itactuallymakes alot of money on brewers.OR
(B)GMCR’s 2011gross profits andearningsareoverstatedby$100 millionand $160 millionrespectively(more or less).2011 EPS is more like $0.60,not$1.30, which means the PE ratio ismore like 35.9x, usingWednesday’s closing price of $21.71 pershare.REPORTEDGROSS MARGINS DON’T MAKE SENSE,IMPLY AVERY LARGE OVERSTATEMENT
Herb Greenberg,“CNBC senior stocks commentator, journalist, hype-buster, creator/proprietor of theORIGINAL Hostile React-o-Meter”asked the question shown above on Monday, July 9. LST has combedthrough dozens of filings, foot notes, etc.and believesGreenberg (and others) are right to questionGMCR’sgross marginand grossprofit figures.In fact, LST believes it’s even worse thanGreenberg suggests, asGMCR’s reportedgross margins don’tmake any sensenor aretheyconsistent with otherinformationthecompany has providedfor years.LST tried to re-create GMCR’s reported gross marginfor 2011.No matter howmuchLST playsaroundwith the numbers(some refer to this as “sensitivities analysis”), the results alllead to the sameconclusion:
Gross profits/marginsfor 2011appearto be overstated materially
,to the tune of 6.3% of sales.LST assumes the followingforthe2011 numbers:1.K-cup gross margin is 30%,based on information provided byGMCRin a SEC comment letterreleased Monday.2.“Brewers and Accessories GrossMargin” is10%,based on a blended average of 0% brewer grossmarginsand 67% gross margin for accessories.3.‘Other Products’ gross margin is 40%, based onGMCR’s historical gross margins prior to itsacquisition and consolidation of Keurig.4.‘Royalties’ gross marginis 100%.