Our recent post, “HOW THE MIGHTY (GMCR) HAS FALLEN”, outlines our current thoughts on Green Mountain. Today’s news, that the company has appointed Gerard Geoffrion – head of its Canada Division – as President Of International Business Development has led the stock higher. We remain negative on Green Mountain. From a quantitative perspective, Keith likes it on the short side at these levels. He added GMCR to our Real Time Positions on the short side earlier today.
From a fundamental perspective, the issues facing this company are legion:
- GMCR’s brand portfolio is – to put it lightly – weak
- Increasing competitive pressure is compressing already-razor-thin margins
- The K-Cup patent having expired allows brands such as Starbucks and Dunkin’ Donuts to detach themselves from licensing agreements with Green Mountain
- We expect Starbucks to part ways with Green Mountain at some point. They did so with Kraft by reason of wanting to control their brand and consumers’ experience of it. They will part with Green Mountain for similar reasons.
- Caribou has expressed reservations about the lack of control it has over its club volumes. GMCR’s pricing strategy has negatively impacted CBOU’s profitability. This could harm the relationship going forward and, if typical of other licensees’ experience, could be a negative for GMCR going forward.
- GAAP EPS may turn negative in FY13 as declining margins, negative cash flow, and competitive pressure comes to bear on financial results.
Howard Penney
Managing Director
Rory Green
Analyst
