PEET Peets Coffee & Tea, Inc. (MM)

Peet's Coffee & Tea Inc. (PEET) reported fourth quarter 2011 adjusted earnings of 42 cents per share, which lagged both the Zacks Consensus Estimate and the prior-year earnings by 2.3% and by 13.0%, respectively. Adjusted earnings of $1.49 per share also missed the Zacks Consensus Estimate by 2.3% in fiscal 2011. However, earnings increased 12.0% from the prior-year.

The adjusted earnings in fiscal 2011 exclude 16 cents per share of expenses associated with a class action lawsuit, including anticipated settlement and legal costs, while earnings in fiscal 2010 exclude 5 cents per share of legal and related expenses incurred by the company for its response to the subpoena it received from the Federal Trade Commission (FTC) in connection with the FTC’s anti-trust review of the acquisition of Diedrich Coffee by Green Mountain Coffee Roasters Inc. (GMCR).

The company reaffirms its 2012 earnings guidance to be in the range of $1.70 to $1.80.

Revenues and Operating Profits

Net revenue climbed 11% for both the fourth quarter and fiscal 2011 to $101.6 million in the quarter and to $371.9 million in fiscal year 2011. Strong sales growth was fuelled by grocery business that was at its strongest at 29% for this quarter and 30% for the year. Revenues, however, lagged the Zacks Consensus Estimate of $103.0 million and $373 million.

Management stated that the quarter saw strong fundamentals and robust business growth. Sales growth was strong across all channels. The company thus reaffirmed its total net revenue to grow around 10% for 2012.

Cost of sales increased to 52.7% based on total net revenue in the reported quarter as compared with 45.7% last year, on the back of higher coffee costs and higher milk costs and a mix shift towards the specialty business. However, price increases and lower shipping expenses partially offset the impact of these higher costs.

Operating expenses, based on net revenue, came down to 28.2% from 30.9% last year, owing to a favorable mix shift to the specialty business, price increases across all channels, leveraging overhead costs, and effective cost management in retail stores and direct store delivery system.

Segment Details

Retail net sales moved up 3% to $56.5 million in the fourth quarter 2011, from $54.7 million a year ago. The growth was attributable to a 6% sales growth in beverages and pastries. Peet’s ended the year with 196 stores versus 192 stores at the end of the year 2010. It opened two stores in the quarter. However, operating income for Retail plummeted 12.9% year over year to $7.1 million.

In fiscal 2011, retails net sales soared 4.5% to $214.3 million, while the segment operating income plummeted 3.5% to $21.8 million.

Specialty segment’s net revenue climbed 22% to $45.1 million for the quarter, compared with $36.9 million for the corresponding period of fiscal 2010. Grocery business grew 29% over last year; the foodservice and office business grew 20%; while home delivery net revenue was flat. Specialty segment reported operating income of $9.2 million, 8.7% lower than the year ago period.

In fiscal 2011, specialty net sales increased 22.5% to $157.6 million, while the segment operating income climbed 2.7% to $34.7 million.

Other Financial Details

At the end of year 2011, cash and cash equivalents plus short-term and long-term marketable securities were $35 million, as compared to $49 million at the end of fiscal 2010.

Total assets were $215.3 million at the end of fiscal 2011, with shareholders’ equity of $178.0 million.

Peet’s Coffee & Tea is a growing company. The company’s high quality standard and its variety are maintained by its vertically integrated business model. Further, management expects momentum and plenty of new growth opportunities for the company. It hopes to deliver strong sales and earnings growth, while continuing to explore and invest in additional growth initiatives.

However, the highly competitive nature of specialty coffee category and the vulnerability of coffee prices to weather and damage by pests concern us.

Currently, Peet’s, which competes with Coca-Cola Enterprises Inc. (CCE) and Starbucks Corporation (SBUX), holds the Zacks #3 Rank, which translates into a short-term Hold rating. Over the long term, we prefer to rate the stock as Neutral.

 
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