THURSDAY, MAY 03, 2012
Green Mountain Coffee Roasters: Is it toxic or is it phantom inventory?
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In the days leading up to Green Mountain Coffee's (NASDAQ: GMCR) latest earnings report released yesterday, this blog published two reports warning investors about a toxic level of inventory building up at the company. (Details of those reports here and here.)
I detailed how in every quarter since the start of fiscal year 2011, Green Mountain Coffee's inventory turnover had increased when each quarter’s numbers are compared to the same quarter of the previous fiscal year. In four of those five quarters, Green Mountain Coffee's reported revenuesexceeded the guidance it gave investors just weeks earlier. Its inventory turnover should have increased because it delivered more products than anticipated to its customers before the close of each quarter to meet unexpected excess demand. Instead, Green Mountain Coffee’s inventory turns decreased, reflecting a longer time to sell its inventory despite reporting revenues that exceeded it projections.
Yesterday, Green Mountain Coffee's reported that its second quarter of fiscal year 2012 revenues were below the guidance it gave to investors just a few weeks before the close of the quarter. However, the company's reported inventory levels ended up much higher than it should have been, even if revenues had matched its low end or high end revenue guidance.
Why is there an excessive build up in inventory levels? Does Green Mountain Coffee have a problem managing its inventory levels or is their phantom inventory on its books? A class action lawsuit filed against the company alleges that it engaged in securities fraud by inflating its inventory numbers to overstate its reported earnings. The Securities and Exchange Commission is investigating Green Mountain Coffee's accounting practices.
Second quarter fiscal year 2012 inventory turnover decreases compared to the second quarter of fiscal year 2011
Yesterday, Green Mountain Coffee reported that its second quarter fiscal year 2012 revenues (quarter ended March 24, 2012) increased 37% to $885.1 million compared to second quarter fiscal year 2011 (quarter ended March 26, 2011) revenues of $647.7 million. On February 1, 2012, Green Mountain Coffee had projected "Net sales growth of 45% to 50%" in the second quarter of fiscal year 2012. Its revenues growth was 8% less than the low end projection and 13% below the high end projection.
Green Mountain Coffee’s inventory turnover decreased to 0.95 times in the second quarter of fiscal year 2012 compared to 1.42 times in the second quarter of fiscal year 2011 and 1.89 times in the second quarter of fiscal 2010. It took Green Mountain Coffee an average of 96.15 days to sell its inventory in the first quarter of fiscal year 2012 compared to 64.06 days in the second quarter of fiscal year 2011 and just 48.23 days in the second quarter of fiscal year 2010. It took the company 50% longer to sell its inventory in the second quarter of fiscal year 2012 compared to the second quarter of fiscal year 2011. In addition, it took the company 99% longer to sell its inventory in the second quarter of fiscal year 2012 compared to the second quarter of fiscal year 2010. (See my calculations here.)
Since Green Mountain Coffee had more inventory on hand due to its failure to meet its revenue projections, we would expect the company to report lower inventory turnover in the second quarter of fiscal year 2012 compared to the second quarter of fiscal year 2011. However, even if Green Mountain Coffee's reported revenues had equaled its low end or high end revenue target, its inventory turns would have still declined in the second quarter of fiscal year 2012 compared to the second quarter of fiscal year 2011!
Second quarter fiscal year 2012 inventory turnover still would have decreased compared to the second quarter of fiscal year 2011 even if company did not fail to meet its guidance
Let's assume that Green Mountain Coffee's second quarter fiscal year 2012 reported revenues equaled its minimum or maximum revenue projections. (Click on image to enlarge.)
If the company's reported revenues had equaled its minimum revenue guidance, its inventory turnover would have been 1.03 times in the second quarter of fiscal year 2012 compared to 1.42 times days in the second quarter of fiscal year 2011. It would have taken Green Mountain Coffee an average of 88.00 days to sell its inventory in the second quarter of fiscal year 2012 compared to 64.06 days to sell its inventory in the second quarter of fiscal year quarter of fiscal year 2011. It would have taken the company 37% longer to sell its inventory in fiscal year 2012 compared to fiscal year 2011.
If the company's reported revenues had equaled its maximum revenue projection, its inventory turns would have been 1.09 times in the second quarter of fiscal year 2012 compared to 1.42 times in the second quarter of fiscal year 2011. It would have taken Green Mountain Coffee an average of 83.55 days to sell its inventory in the second quarter of fiscal year 2012 compared to 64.06 days to sell its inventory in the second quarter of fiscal year quarter of fiscal year 2011. It would have taken the company 30% longer to sell its inventory in fiscal year 2012 compared to fiscal year 2011.
Green Mountain Coffee's excessive inventory levels cannot be explained by its failure to report revenues matching its revenue guidance. There are two plausible explanations: (1) an inability to manage inventories levels or (2) an inflation of inventory numbers to cook the books if we assume that allegations in the class action lawsuit are true. Is Green Mountain Coffee another Crazy Eddie?
Written by:
Sam E. Antar |
