Green Mountain Coffee borrows a New method to predict sales and ease investor sentiment

Green Mountain Coffee has finally found a way to ease investor nerves, at least for a while.

The maker of K-Cup coffee says it has designed a better model to predict product demand and ease investor concerns as it faces increasing competition in the single-cup coffee market. Green Mountain Coffee reported weak earnings, but the company's shares soared 35% as investors were encouraged by increased transparency in the third quarter.

Green Mountain Coffee acquired Keurig in 2006 and began to expand its business rapidly, making it difficult for the company to predict K-Cup coffee sales and investors' doubts about profit expectations.

"after the second quarter, we made product sales a top priority and found better forecasting methods, which enabled us to better meet the future needs of consumers," Larry Blanford, chief executive of Green Mountain Coffee, said in an interview.

Green Mountain Coffee has affected profitability this year due to excess inventory and declining production levels, Larry Branford added. "over the past 90 days, the company has worked hard to analyze the gap between product expectations and consumer demand for K-Cup coffee."

The new forecast method of Green Mountain Coffee Company takes into account the inventory of individual retailers at the beginning of the month, planned shipments and inventory at the end of the month. Over the past few years, Green Mountain Coffee has used sales departments, historical sales data and consumer surveys to estimate product sales.

Larry Branford said, "over the past few years, our historical model has been very predictable. But as we reached a certain degree of product saturation, the model began to fail, and consumers said they were buying more products than in the past. "

Green Mountain Coffee reported that reduced demand for K-Cup coffee products led to a decline in production levels as of June 23, causing the company's gross profit margin to fall to 34.8% from 36.8% in the same period last year.

Green Mountain believes that the new survey shows that people usually buy K-Cup coffee at grocery stores, large retail supermarkets such as Wal-Mart and member stores such as Costco, rather than professional retail stores and department stores. The shift has affected Green Mountain's expectations because grocery stores have faster inventory turnover than professional retail stores.

Larry Branford said, "forecasting sales is very difficult, on the one hand, because some retailers regard sales data as private data, we can only use third-party research data, but this is the best way to predict business right now."

Green Mountain's troubles with investors began in October when David David Einhorn, chairman of hedge fund Greenlight Capital, released 110-page slides accusing Green Mountain of a lack of transparency and accounting errors. In May 2012, Green Mountain lost half its market value in one day, and its second-quarter profit was affected by high sales expectations.

Green Mountain Coffee now says its inability to accurately forecast sales is due in part to ignoring the effects of the weather, rising prices for K-cup coffee and changes in where consumers buy coffee. Larry Branford says they are still committed to improving and adjusting the new system, but it will take some time to perfect.

Some analysts believe that even if sales forecasts are controlled, competition from K-cup Coffee will force Green Mountain Coffee to lower prices and invest more promotional fees, further squeezing its profits. Green Mountain Coffee says it has taken these two factors into account.

Shares of Green Mountain Coffee, based in Waterbury, Vermont, hit a high of nearly $116 last September and have been falling ever since. Even as shares rebounded on Thursday, they are still down 50% so far this year.

Green Mountain Coffee now trades at a price-to-earnings ratio of about 11 times, which investors think is a reasonable price, compared with 140 times in the same period last year.

Executives at Green Mountain Coffee were satisfied with the rebound in its share price on Thursday, a move that frustrated a large number of short-sellers. Some short sellers assumed that the company's share price continued to fall, believing that they would redeem the stock cheaply, only to be forced to buy Green Mountain Coffee shares back and forth to cover their positions, further pushing up the company's share price.

As of July 13, short-term investors held 13% of the outstanding shares of Green Mountain Coffee, according to the market research firm. Greenlight Capital said last week that its short position in Green Mountain Coffee was the biggest winner of the quarter. In addition to David Einhorn, other short-term investors also accused Green Mountain of exaggerating profits.

Green Mountain Coffee has repeatedly denied the allegations, saying its research is flawed. The company has been under investigation by the Securities and Exchange Commission since 2006, and the SEC asked the company to reiterate its financial report for fiscal year 2010 to fiscal year 2010.