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Takeaway: GMCR is "cheap" but it may get cheaper.

Discounting is a difficult strategy to evaluate.  It can be a sign of strength in one instance and a sign of weakness in another.  We view the heavy discounting of K-Cups as a clear sign of weakness in the Green Mountain Coffee Roasters business model. 

A walk around a Lucky Supermarket in Santa Rosa, California, revealed that K-Cups are being sold for $4.99 per box.  In light of this discovery, we would make the following observations:

  1. Discounting of this magnitude calls into question the accuracy of the company’s internal “demand model”
  2. It is almost certain that the company has ongoing inventory issues
  3. The margin structure of the company is under duress
  4. Given the cash flow and balance sheet of the company, as well as the competitive landscape, a turnaround is going to be a tall order from here

As we have written before, it is almost impossible to analyze this company in a conventional manner given the lack of coherence and disclosure in the company’s guidance, particularly with regard to its capex budget.  Whispers continue to occasionally spur bouts of short covering but our view is that the risk in this stock remains disproportionately to the downside. 

GMCR STOCK AND K-CUPS ARE BARGAINS FOR A REASON - gmcr kcup 4.99

Howard Penney

Managing Director

Rory Green

Analyst