By Annie Gasparro
Green Mountain Coffee Roasters Inc. (GMCR) recently fielded questions from regulators regarding the expiration of its key patents on K-cup portion packs for its Keurig single-serve coffee brewers.
Two of Green Mountain's K-cup patents are set to expire in September, opening it up to a world of new competition by private-label brands planning lower-priced offerings and coffee companies manufacturing their own portion packs instead of going through Green Mountain.
In a series of letters released by the Securities and Exchange Commission Monday, the regulators probed Green Mountain for more details regarding the impact of the loss of those patents.
"Tell us whether any of the patents that will expire in the near future are those that 'cover significant aspects' of your products," the SEC wrote in a letter dated April 23 reviewing Green Mountain's 2011 annual report. Additionally, the regulators asked Green Mountain whether it is "reasonably possible" that the patent expirations will have a "material impact" on its financial results.
Green Mountain responded, saying the patents do cover significant aspects of its K-cup technology, but added that it has competitive strengths, aside from its intellectual property, which mitigate the potential impact of the patent expirations.
Green Mountain has dominated the growing single-serve coffee industry since acquiring the remainder of the Keurig business in June 2006--a position it says gives it the "efficiencies and scale to support increasing consumer demand at a lower cost than its competitors." Additionally, Green Mountain said it has the advantage of a broad portfolio, selling more than 200 varieties of K-cups with brands such as Dunkin' Donuts and Starbucks. "Finally, the company continues to develop new products, including its recently introduced Keurig Vue brewer," which uses Vue Packs instead of K-cup technology, the letter states.
Green Mountain added in its response that it doesn't have any additional data that would lead it to believe the patent expirations will materially impact its financial position.
The SEC replied with a letter dated June 8 saying it has completed the review of the annual report, which is not related to the ongoing SEC inquiry into its accounting practices from September 2010. But increased competition remains a real headwind for Green Mountain.
Supermarket operators Kroger Co. (KR) and Safeway (SWY) recently announced plans to come out with their own single-serve coffee pods for use in Green Mountain's Keurigs this autumn. Around the same time, Starbucks Corp. (SBUX) is planning to launch its own high-end, single-serve espresso brewer.
Green Mountain's shares have tumbled from September's $115 area as criticism from hedge fund tycoons and lower-than-expected quarterly sales hurt investor confidence. In recent trading Monday, the stock was down 2.8% at $23.81, a 75% decline from a year ago.
Green Mountain's trouble with investors took flight in October, when Greenlight Capital Chairman David Einhorn presented an infamous 110-page slideshow complaining of a lack of transparency in Green Mountain's financial reports and arguing that "capital spending is growing much faster than the business."
Green Mountain has repeatedly said it is following all reporting regulations, but that it doesn't yet understand its own business well enough to provide more transparency.
For instance, in May, Green Mountain said it would make less money than it originally thought this year because of difficulties predicting sales, which left the company with excess inventory in its fiscal second quarter and prevented it from maximizing the capabilities of its manufacturing plants. In the past, it has underestimated sales and had trouble keeping up with orders.
Green Mountain Chief Executive Larry Blanford said the company's inability to anticipate consumer demand is in part because it doesn't understand the potential impact of certain factors, such as milder winter weather, consumer responses to price increases and volatility of orders from retailers that stock its products.
The uncertainty surrounding Green Mountain's trajectory has caused roughly 15% of investors to bet the stock will decline. But Green Mountain's business is still rapidly growing, with net sales from Keurig brewers and accessories up 21% and K-Cup sales up 59% in its second quarter, which ended March 24.
For the third quarter, Green Mountain has projected adjusted earnings of 48 cents to 53 cents a share on sales growth of 20% to 25%. It's expected to report the results early next month.
Write to Annie Gasparro at email@example.com