With Green Mountain Coffee Roasters Inc. poised to report its slowest quarterly sales growth since 2005, Chief Executive Officer Lawrence J. Blanford faces pressure to prove the company is a sustainable business.
The question for investors is whether Blanford, hired five years ago to help Green Mountain transcend its startup culture, can shake off the influence of founder Robert P. Stiller. While Stiller was removed as chairman in May after violating company policy when he sold stock to meet a margin call, he is the fourth-largest shareholder, sits on the board and plays an active role. Amid the challenges facing the company, the shares have slid 60 percent this year, after more than doubling between March and September last year.
Since Blanford, 57, became CEO, analysts and investors have called Stiller following quarterly earnings reports, showing they perceived the founder, not Blanford, was calling the shots, according to Paul Hodgson, senior research associate at GMI Ratings, a New York-based corporate governance consulting firm.
“If they’re still doing that, then there’s a perception that he’s still running the company,” Hodgson said in an interview. “That’s not healthy when you have a CEO.”
In an e-mailed statement, Stiller said he has not had conversations with analysts and investors after earnings calls since relinquishing the CEO post in 2007, when he handed over all investor-relations duties to Blanford.
In its 31-year history, Green Mountain has never confronted so many challenges. The company, which dominates the single- serve coffee market with its Keurig brewers and K-Cup pods, is losing customers to Safeway Inc. (SWY:US) and Kroger Co. (KR:US), which are making their own versions of K-Cups. After more than doubling sales in the third quarter of 2011, Green Mountain will on Aug. 1 report sales growth of 22 percent, according to data compiled by Bloomberg. Net income (GMCR:US) excluding certain items will advance 14 percent to $77.5 million, for the smallest gain in more than three years, according to analysts’ estimates (GMCR:US).
Meanwhile, Green Mountain faces questions about how it accounted for a tripling of revenue (GMCR:US) in the past two years. The U.S. Securities and Exchange Commission is investigating, and hedge fund manager David Einhorn has hammered the company for a perceived lack of transparency. In May, Blanford told analysts his team was struggling to forecast demand for K-Cups, which in fiscal 2011 generated about 64 percent of sales.
While Stiller led Green Mountain capably for many years, it’s time for Blanford to show that he’s credible, according to Rick Munarriz, a Miami-based analyst at the Motley Fool.
Green Mountain “needs to prove itself now more than ever,” Munarriz said in an interview. “Stiller took the company as far as he could.”
Suzanne DuLong, a spokeswoman for Green Mountain, declined to comment citing a quiet period before earnings.
People who have known Stiller since the 1970s and 1980s say they aren’t surprised Green Mountain sometimes seems more like a startup than a company with a market capitalization of about $2.8 billion. Stiller wasn’t the most professional manager or business partner, said Burton Rubin, who with Stiller started the E-Z Wider cigarette-rolling papers business in 1972.
Rubin said he was blindsided in 1979 upon discovering that Stiller was trying to sell E-Z Wider without consulting him. Rolling paper maker Rizla, now owned by Imperial Tobacco Group Plc (IMT), bought their business for $6.2 million in 1980.
“All of a sudden, one month, I get a notice” that someone wanted to buy the business, he said in a telephone interview. “The split-up of our company was not gracious.”
“He was very ambitious and that sometimes led him astray,” said Rubin, who now makes ergonomic pens in New York.
In the e-mailed statement, Stiller said: “I tried to buy out his interest. We ultimately agreed to auction the company off to the highest bidder.”
At Green Mountain in the early 1980s Stiller declined to press charges against an accountant and partner who was embezzling money, according to Doug Balne, who co-founded the company. Stiller bought out Balne after the two men disagreed over the incident, Balne said in a phone interview.
“I was just flabbergasted,” Balne said. “I immediately started losing interest in being in the business.”
Removing the partner was “the most practical approach” at the time, Stiller said in the statement.
Green Mountain wouldn’t be what it is today without Stiller’s entrepreneurial skills. No decision was more transformative than his move in 2006 to spend (GMCR:US) $104.3 million to buy the part of Keurig Green Mountain didn’t already own. Stiller alone saw what other executives missed: an up-and-comer with the single-serve technology to upend an entire industry and turn Green Mountain from a niche player into a contender that rivals would end up copying.
Stiller, described by former associates as something of a hippie, instilled a crunchy ethos at Green Mountain. He pushed environmental projects such as biodegradable coffee bags, set up meditation rooms at the Waterbury, Vermont headquarters and paid employees to take a week off each year and volunteer.
“Stiller was the inspiration behind the scene,” said Daniel Cox, who says he worked in sales at Green Mountain from 1981 to 1992, when Stiller was still CEO. “His job was making sure the company ran smoothly and my job was just to keep bringing in more sales.”
However, some of Stiller’s actions raised a red flag, according to a May report from GMI Ratings, the corporate governance consulting firm. It listed Heritage Aviation, a business that flies executives around the U.S. that was acquired by Stiller in 2002, as a “related-party” transaction in its governance section. Last year, Heritage charged Green Mountain $700,000, according to a proxy statement. Green Mountain director, Jules del Vecchio, is Stiller’s brother-in-law, the report notes.
GMI Ratings gave Green Mountain’s board a “D” grade, which is shared by about 20 percent of North American public companies, according to Hodgson. The firm said the board was “entrenched,” meaning its directors have been members for too long and are insufficiently independent.
Blanford was brought in so Stiller could focus on board and governance issues -- the very things that ultimately would lead to his ouster. “Separating the roles of Chairman and CEO will have the important benefit of strengthening Green Mountain Coffee’s corporate governance practices,” the company said in a statement on May 3, 2007. After Stiller’s ouster, the company named Michael J. Mardy chairman.
“I am actively serving as a director of the board, working on issues with other board members to improve governance and operations of the board,” Stiller said in the statement.
Before joining Green Mountain, Blanford ran Royal Group Technologies Ltd., a Canadian maker of plastic building components, and before that was CEO of Philips Consumer Electronics North America. Since joining Green Mountain, Blanford has created new ways for consumers to get single-serve beverages, including licensing Starbucks Corp. (SBUX:US) and Dunkin’ Brands Group Inc. (DNKN:US)’s Dunkin’ Donuts names to boost K-Cup revenue. Single-cup capsule sales jumped 59 percent to $655 million in the quarter ended March 24 compared to a year ago. He also created the more-expensive Vue brewer that makes milk-based drinks to compete with espresso makers.
With the main K-Cup patents expiring in September, analysts such as Mark Astrachan at Stifel Nicolaus & Co. in New York have said more competition will hurt the company’s market share.
It will be up to Blanford to allay shareholder concerns with improved sales forecasting and consistent earnings growth, according to Mitchell Pinheiro, an analyst at Janney Montgomery Scott in Philadelphia.
As Green Mountain struggles to forecast demand for the single-cup capsules, Blanford continues to unveil new iterations of the K-Cup, such as Eight O’Clock coffee and Tetley tea. He also has said that the company has done nothing to warrant an SEC inquiry.
“It’s extremely difficult to estimate a business that’s been growing at a compound annual growth rate of 75 percent,” Blanford said in an interview on May 2. “We think we have significant opportunity to continue to create shareholder value -- we believe we have a long runway.”
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