THE BULL CASE FOR GMCR IS COMPELLING!

Taken together, the combination of Keurig brewers, patented K-cups and Green Mountain specialty coffee has provided the company with strong top line growth. The continued bullish scenario is based on; (1) favorable specialty coffee market; (2) a razor/razor blade model that generates recurring revenue; and (3) yet-untapped multi-channel distribution opportunities.

I have my doubts. The K-cup -razor/razor blade model is a long way from generating the type of revenues needed to drive over all profitability. In the short run, the company is selling a lot of brewers where they don’t have any gross margins at all. This showing up in the company's consolidated results, where the gross profit margin in F3Q08 declined to 36% from 41% last year. In a challenging economic environment, GMCR is banking on the consumer to pay a premium for a coffee maker and the K-cups to brew the coffee. The destruction in gross margins and the corresponding inventory build is made clear in a chart borrowed from my partner Brian McGough. If consumer demand slows this is going to get ugly!

Developing……