PEET Peets Coffee & Tea, Inc. (MM)

Peet's Coffee & Tea Inc. (PEET) has posted first quarter 2012 earnings of 25 cents per share, which missed both the Zacks Consensus Estimate and the prior-year earnings of 31 cents and 41 cents per share, respectively. The first quarter results plunged owing to high green coffee costs.

Quarter in Detail

Net revenue climbed 7% in the first quarter 2012 to $94.8 million. Revenue, however, lagged the Zacks Consensus Estimate of $97.0 million. Peet’s grocery business posted highest sales increase of 12% for this quarter.

Cost of sales and related occupancy expenses increased to 51.0% on total net revenue in the reported quarter as compared with 46.6% last year. Higher coffee costs per pound surged 44% from the prior-year quarter, which led to the 440 basis points (bps) increase in overall costs. However, price increases and lower shipping expenses partially offset the impact of these higher costs.

Operating expenses, based on net revenue, remained flat at 31.5% in the quarter, owing to a favorable mix shift to the specialty business and price increases across all channels, offset by overhead investments and increased payment card processing fees.

Segment Details

Retail net sales moved up 4% to $54.1 million in the first quarter of 2012, from $52.1 million a year ago. The growth was attributable to growth in beverages and pastries as well as whole-bean and related sales. Peet’s ended the quarter with 197 retail stores, with the opening of one store in the first quarter.

Segment operating income plummeted 12.8% year over year to $5.7 million. Operating margin at Retail also contracted 200 bps to 10.6% in the first quarter of 2012.

Specialty net sales climbed 12% to $40.7 million for the quarter, compared with $36.4 million for the corresponding period. Grocery business grew 12% over last year; the foodservice and office business grew 16%; while home delivery net revenue was flat with prior-year quarter levels.

Segment operating income plunged 19.5% to $7.7 million in the quarter. Operating margin at Specialty also dropped 740 bps to 18.9%.

Other Financial Details

At the end of April 1, 2012, cash and cash equivalents were $45.0 million, as compared to $30.8 million at the end of January 1, 2012.

Guidance

The company reaffirmed its 2012 earnings guidance to be in the range of $1.70 to $1.80 per share. The company also expects its total net revenue to grow around 10% for 2012.

Recently, Peet’s competitor Starbucks Corporation (SBUX) reported earnings of 40 cents per share for fiscal second quarter 2012, beating the Zacks Consensus Estimate by a penny. Quarterly earnings increased 18% year over year driven by a solid top line, improved efficiencies and cost control. The company also raised its fiscal 2012 outlook due to improving business trends and strong first half results.

Our Recommendation

Though Peet’s results were disappointing owing to higher cost inflation, we believe that the company will deliver strong earnings growth in the later half of the year, while continuing to explore and invest in additional growth initiatives. We are encouraged by Peet’s growth momentum and plenty of new growth opportunities available for the company.

Peet’s currently holds a Zacks #2 Rank (short-term Buy rating). Over the long-term, we provide a Neutral recommendation on the stock.

 
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