UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
|
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the quarterly period ended June 29, 2008
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE
ACT OF
1934
|
Commission
file number 0-32233
PEET’S
COFFEE & TEA, INC.
(Exact
Name of Registrant as Specified in Its Charter)
|
Washington
|
|
91-0863396
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
1400
Park Avenue
Emeryville,
California 94608-3520
(Address
of Principal Executive Offices)(Zip Code)
(510)
594-2100
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Common
Stock, no par value
Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes
x
No
¨
.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See
the definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
|
Large
Accelerated Filer
o
|
|
Accelerated
Filer
x
|
|
Non-Accelerated
Filer
o
|
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes
o
No
x
As
of
August 3, 2008, 13,562,204 shares of registrant’s Common Stock were
outstanding.
|
|
INDEX
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Page
|
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PART
I
|
FINANCIAL
INFORMATION
|
|
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|
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|
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Item
1.
|
Consolidated
Financial Statements
|
|
3
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
11
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
|
15
|
|
Item
4.
|
Controls
and Procedures
|
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15
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|
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PART
II
|
OTHER
INFORMATION
|
|
|
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
16
|
|
Item
1A.
|
Risk
Factors
|
|
16
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
16
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
|
17
|
|
Item
6.
|
Exhibits
|
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17
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|
|
Signatures
|
|
17
|
PART
I – FINANCIAL INFORMATION
ITEM
1. CONSOLIDATED FINANCIAL STATEMENTS
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
BALANCE SHEETS
(Unaudited,
in thousands, except share amounts)
|
|
|
June 29,
|
|
December 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
7,099
|
|
$
|
15,312
|
|
|
Short-term
marketable securities
|
|
|
11,003
|
|
|
7,932
|
|
|
Accounts
receivable, net
|
|
|
8,318
|
|
|
8,287
|
|
|
Inventories
|
|
|
27,367
|
|
|
24,483
|
|
|
Deferred
income taxes - current
|
|
|
2,950
|
|
|
2,950
|
|
|
Prepaid
expenses and other
|
|
|
6,291
|
|
|
4,285
|
|
|
Total
current assets
|
|
|
63,028
|
|
|
63,249
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
marketable securities
|
|
|
-
|
|
|
7,831
|
|
|
Property,
plant and equipment, net
|
|
|
108,435
|
|
|
99,231
|
|
|
Deferred
income taxes - non current
|
|
|
3,363
|
|
|
3,353
|
|
|
Other
assets, net
|
|
|
3,908
|
|
|
3,883
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
178,734
|
|
$
|
177,547
|
|
|
|
|
|
|
|
|
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|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and other accrued liabilities
|
|
$
|
12,360
|
|
$
|
10,104
|
|
|
Accrued
compensation and benefits
|
|
|
9,065
|
|
|
8,909
|
|
|
Deferred
revenue
|
|
|
4,673
|
|
|
5,856
|
|
|
Total
current liabilities
|
|
|
26,098
|
|
|
24,869
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
lease credits and other long-term liabilities
|
|
|
6,516
|
|
|
5,425
|
|
|
Total
liabilities
|
|
|
32,614
|
|
|
30,294
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity
|
|
|
|
|
|
|
|
|
Common
stock, no par value; authorized 50,000,000 shares; issued and
outstanding:13,610,000 and 13,932,000 shares
|
|
|
98,322
|
|
|
104,616
|
|
|
Accumulated
other comprehensive income
|
|
|
86
|
|
|
52
|
|
|
Retained
earnings
|
|
|
47,712
|
|
|
42,585
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareholders' equity
|
|
|
146,120
|
|
|
147,253
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
|
$
|
178,734
|
|
$
|
177,547
|
|
See
notes
to consolidated financial statements.
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
STATEMENTS OF INCOME
(Unaudited,
in thousands, except per share amounts)
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
June 29,
|
|
July 1,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
stores
|
|
$
|
46,309
|
|
$
|
40,963
|
|
$
|
90,918
|
|
$
|
79,986
|
|
|
Specialty
sales
|
|
|
23,746
|
|
|
19,140
|
|
|
46,272
|
|
|
37,630
|
|
|
Net
revenue
|
|
|
70,055
|
|
|
60,103
|
|
|
137,190
|
|
|
117,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and related occupancy expenses
|
|
|
32,240
|
|
|
28,374
|
|
|
64,229
|
|
|
55,564
|
|
|
Operating
expenses
|
|
|
24,689
|
|
|
21,366
|
|
|
48,218
|
|
|
41,179
|
|
|
General
and administrative expenses
|
|
|
5,434
|
|
|
5,357
|
|
|
10,996
|
|
|
11,300
|
|
|
Depreciation
and amortization expenses
|
|
|
3,176
|
|
|
2,586
|
|
|
6,246
|
|
|
5,316
|
|
|
Total
costs and expenses from operations
|
|
|
65,539
|
|
|
57,683
|
|
|
129,689
|
|
|
113,359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from operations
|
|
|
4,516
|
|
|
2,420
|
|
|
7,501
|
|
|
4,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
202
|
|
|
463
|
|
|
506
|
|
|
888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
4,718
|
|
|
2,883
|
|
|
8,007
|
|
|
5,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax provision
|
|
|
1,682
|
|
|
1,081
|
|
|
2,880
|
|
|
1,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
3,036
|
|
$
|
1,802
|
|
$
|
5,127
|
|
$
|
3,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.22
|
|
$
|
0.13
|
|
$
|
0.37
|
|
$
|
0.24
|
|
|
Diluted
|
|
$
|
0.21
|
|
$
|
0.13
|
|
$
|
0.36
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
used in calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
13,916
|
|
|
13,663
|
|
|
13,936
|
|
|
13,589
|
|
|
Diluted
|
|
|
14,197
|
|
|
14,077
|
|
|
14,217
|
|
|
14,003
|
|
See
notes
to consolidated financial statements.
PEET’S
COFFEE & TEA, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
|
|
|
Twenty-six weeks ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
|
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
$
|
5,127
|
|
$
|
3,218
|
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
7,322
|
|
|
6,228
|
|
|
Amortization
of interest purchased
|
|
|
114
|
|
|
108
|
|
|
Stock-based
compensation
|
|
|
1,297
|
|
|
1,445
|
|
|
Excess
tax benefit from exercise of stock options
|
|
|
(68
|
)
|
|
(887
|
)
|
|
Tax
benefit from exercise of stock options
|
|
|
52
|
|
|
842
|
|
|
Loss
on disposition of assets and asset impairment
|
|
|
136
|
|
|
113
|
|
|
Deferred
income taxes
|
|
|
(10
|
)
|
|
|
|
|
Changes
in other assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(31
|
)
|
|
81
|
|
|
Inventories
|
|
|
(2,884
|
)
|
|
(5,631
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(2,006
|
)
|
|
(2,120
|
)
|
|
Other
assets
|
|
|
(72
|
)
|
|
59
|
|
|
Accounts
payable, accrued liabilities and deferred revenue
|
|
|
(449
|
)
|
|
(1,116
|
)
|
|
Deferred
lease credits and other long-term liabilities
|
|
|
1,091
|
|
|
603
|
|
|
Net
cash provided by operating activities
|
|
|
9,619
|
|
|
2,943
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property, plant and equipment
|
|
|
(14,943
|
)
|
|
(18,160
|
)
|
|
Proceeds
from sales of property, plant and equipment
|
|
|
6
|
|
|
-
|
|
|
Proceeds
from sales and maturities of marketable securities
|
|
|
5,597
|
|
|
22,863
|
|
|
Purchases
of marketable securities
|
|
|
(917
|
)
|
|
(17,961
|
)
|
|
Net
cash used in investing activities
|
|
|
(10,257
|
)
|
|
(13,258
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
634
|
|
|
4,033
|
|
|
Purchase
of common stock
|
|
|
(8,277
|
)
|
|
-
|
|
|
Excess
tax benefit from exercise of stock options
|
|
|
68
|
|
|
887
|
|
|
Net
cash (used in)/provided by financing activities
|
|
|
(7,575
|
)
|
|
4,920
|
|
|
|
|
|
|
|
|
|
|
|
Decrease
in cash and cash equivalents
|
|
|
(8,213
|
)
|
|
(5,395)
##
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
15,312
|
|
|
7,692
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
7,099
|
|
$
|
2,297
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures incurred, but not yet paid
|
|
$
|
3,673
|
|
$
|
1,671
|
|
|
Other
cash flow information:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
|
4,972
|
|
|
3,748
|
|
See
notes
to consolidated financial statements.
Peet’s
Coffee & Tea, Inc.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
The
accompanying consolidated financial statements of Peet’s Coffee & Tea, Inc.
and its subsidiaries (collectively, the “Company” or “Peet’s”) as of June 29,
2008 and for the thirteen and twenty-six weeks ended June 29, 2008 and July
1,
2007 are unaudited and, in the opinion of management, contain all adjustments,
consisting only of normal recurring items necessary to present fairly the
financial position and results of operations for such periods.
The
information included in this Quarterly Report on Form 10-Q (this “Form 10-Q”)
should be read in conjunction with the Company’s annual consolidated financial
statements in Peet’s Annual Report on Form 10-K for the year ended December 30,
2007 (the “2007 Form 10-K”).
The
results of operations for the thirteen and twenty-six weeks ended June 29,
2008
are not necessarily indicative of the results expected for the full
year.
|
2.
|
Summary
of Significant Accounting
Policies
|
Comprehensive
Income
For
the
thirteen weeks ended June 29, 2008 and July 1, 2007, comprehensive income was
$2,989,000 and $1,770,000, respectively. For the twenty-six weeks ended June
29,
2008 and July 1, 2007, comprehensive income was $5,161,000 and $3,209,000,
respectively. Comprehensive income consists of net income and net unrealized
gains and losses on investments.
Net
Income per Share
Basic
net
income per share is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted net income per
share
reflects the potential dilution that could occur from common shares issued
through stock options. Anti-dilutive shares of 1,221,139 and 796,904 have been
excluded from diluted weighted average shares outstanding for the thirteen
week
periods ended June 29, 2008 and July 1, 2007, respectively, and 1,164,475 and
911,850 for the twenty-six week periods, respectively.
The
number of incremental shares from the assumed exercise of stock options was
calculated by applying the treasury stock method. The following table summarizes
the differences between basic weighted average shares outstanding and diluted
weighted average shares outstanding used to compute diluted net income per
share
(in thousands):
|
|
|
13 weeks ended
|
|
26 weeks ended
|
|
|
|
|
June
29,
2008
|
|
July
1,
2007
|
|
June
29,
2008
|
|
July
1,
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average shares outstanding
|
|
|
13,916
|
|
|
13,663
|
|
|
13,936
|
|
|
13,589
|
|
|
Incremental
shares from assumed exercise of stock options
|
|
|
281
|
|
|
414
|
|
|
281
|
|
|
414
|
|
|
Diluted
weighted average shares outstanding
|
|
|
14,197
|
|
|
14,077
|
|
|
14,217
|
|
|
14,003
|
|
Recently
Issued Accounting Standards
In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157 “Fair Value Measurements” (SFAS
157). SFAS 157 introduces a framework for measuring fair value and
expands required disclosure about fair value measurements of assets and
liabilities. SFAS 157 for financial assets and liabilities is
effective for fiscal years beginning after November 15, 2007 and the Company
has
adopted the standard for those assets and liabilities as of the beginning of
the
2008 fiscal year and the impact of adoption was not significant. SFAS 157
defines fair value as the exchange price that would be received for an asset
or
paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 also establishes a fair
value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair
value:
Level
1
-
Quoted
prices in active markets for identical assets or liabilities.
Level
2 -
Inputs
other than quoted prices included within Level 1 that are either directly or
indirectly observable.
Level
3
-
Unobservable inputs that are supported by little or no market activity,
therefore requiring an entity to develop its own assumptions about the
assumptions that market participants would use in pricing.
The
Company utilizes the market approach, as defined as Level 1 in the fair value
hierarchy, to measure fair value for its financial assets and
liabilities. The market approach uses prices and other relevant
information generated by market transactions involving identical or comparable
assets or liabilities. Assets measured at fair value on a recurring basis are
summarized below (in thousands):
|
|
|
June 29,
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
Short-term
marketable securities
|
|
$
|
11,003
|
|
|
Restricted
cash (included in other assets, net)
|
|
|
3,308
|
|
|
|
|
$
|
14,311
|
|
Unrealized
gains or losses on marketable securities are recorded in accumulated other
comprehensive income at each measurement date.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities — Including an amendment of FASB
Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to elect to
measure financial instruments and certain other items at fair value. Upon
adoption of SFAS 159, an entity may elect the fair value option for eligible
items that exist at the adoption date. Subsequent to the initial adoption,
the
election of the fair value option can only be made at initial recognition of
the
asset or liability or upon a re-measurement event that gives rise to new-basis
accounting. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. The Company has adopted the standard as of the beginning
of the 2008 fiscal year and the impact of adoption was not significant as the
Company did not elect to record additional items at fair value.
The
Company’s inventories consist of the following (in thousands):
|
|
|
June 29,
|
|
December 30,
|
|
|
|
|
2008
|
|
2007
|
|
|
Green
coffee
|
|
$
|
19,765
|
|
$
|
15,421
|
|
|
Other
inventory
|
|
|
7,602
|
|
|
9,062
|
|
|
Total
|
|
$
|
27,367
|
|
$
|
24,483
|
|
|
4.
|
Stock
Purchase Program
|
On
September 6, 2006, the Board of Directors approved a stock purchase program
providing for the purchase of one million shares of the Company’s common stock,
with no deadline for completion. During the thirteen weeks ended June 29, 2008,
the Company purchased and retired 358,869 shares of common stock, at an average
price of $23.06, in accordance with the stock purchase program.
|
5.
|
Stock
Option and Employee Stock Purchase
Plans
|
Stock
Option Plans
The
Company maintains several equity incentive plans under which it may currently
grant non-qualified stock options to employees and non-employee
directors.
Changes
in stock options were as follows:
|
|
|
|
|
|
|
Weighted Average
|
|
Aggregate
|
|
|
|
|
|
|
Weighted Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
Options
|
|
Exercise Price
|
|
Contractual
|
|
Value
|
|
|
|
|
Outstanding
|
|
Per Share
|
|
Life (Years)
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 30, 2007
|
|
|
2,579,363
|
|
$
|
21.36
|
|
|
|
|
|
|
|
|
Granted
|
|
|
304,964
|
|
|
23.62
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(40,069
|
)
|
|
27.64
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,164
|
)
|
|
12.04
|
|
|
|
|
|
|
|
|
Oustanding
at June 29, 2008
|
|
|
2,828,094
|
|
|
21.56
|
|
|
6.06
|
|
$
|
6,934
|
|
|
Vested
or expected to vest, June 29, 2008
|
|
|
2,618,175
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at June 29, 2008
|
|
|
1,884,440
|
|
|
19.02
|
|
|
4.84
|
|
|
6,934
|
|
Employee
Stock Purchase Plan
The
Company has an Employee Stock Purchase Plan (“ESPP”) where eligible employees
can choose to have up to 15% of their annual earnings withheld to purchase
the
Company’s common stock. The purchase price of stock is 85% of the lower of the
beginning of the offering period or end of the offering period market price.
The
Company authorized 200,000 shares of common stock available for issuance under
the ESPP, which will be increased as of each annual meeting of the Company’s
shareholders, until 2020, by the lesser of 200,000 shares or 1.5% of the number
of shares of common stock outstanding on that date. However, the Board of
Directors has the authority to increase the ESPP reserve by a smaller number
of
shares of common stock on that date. During the thirteen week period ended
June
29, 2008, no shares were purchased of the Company’s common stock under the plan.
At June 29, 2008, 1,151,735 shares remain available for future issuance under
the ESPP.
Stock-Based
Compensation
Stock-based
compensation expense consists of and was recognized in the consolidated
statements of income as follows (in thousands):
|
|
|
Thirteen weeks ended
|
|
Twenty-six weeks ended
|
|
|
|
|
June 29,
|
|
July 1,
|
|
June 29,
|
|
July 1,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
option expense
|
|
$
|
571
|
|
$
|
659
|
|
$
|
1,190
|
|
$
|
1,303
|
|
|
ESPP
expense
|
|
|
58
|
|
|
71
|
|
|
107
|
|
|
142
|
|
|
Total
|
|
$
|
629
|
|
$
|
730
|
|
$
|
1,297
|
|
$
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and related occupancy expenses
|
|
$
|
50
|
|
$
|
61
|
|
$
|
103
|
|
$
|
114
|
|
|
Operating
expenses
|
|
|
290
|
|
|
241
|
|
|
590
|
|
|
479
|
|
|
General
and administrative expenses
|
|
|
289
|
|
|
428
|
|
|
604
|
|
|
852
|
|
|
Total
|
|
$
|
629
|
|
$
|
730
|
|
$
|
1,297
|
|
$
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
benefit
|
|
$
|
256
|
|
$
|
298
|
|
$
|
529
|
|
$
|
590
|
|
The
fair
value of each option grant and ESPP award is estimated on the date of grant
using the Black-Scholes-Merton (“Black-Scholes”) option-pricing model with the
following assumptions for the twenty-six week periods ended June 29, 2008 and
July 1, 2007:
|
|
|
Stock Options
|
|
ESPP
|
|
|
|
|
June 29,
2008
|
|
July 1,
2007
|
|
June 29,
2008
|
|
July 1,
2007
|
|
|
Expected
term (in years)
|
|
|
5.2
|
|
|
5.3
|
|
|
0.5
|
|
|
0.5
|
|
|
Expected
stock price volatility
|
|
|
34.3
|
%
|
|
30.0
|
%
|
|
22.5
|
%
|
|
27.8
|
%
|
|
Risk-free
interest rate
|
|
|
3.7
|
%
|
|
5.0
|
%
|
|
3.4
|
%
|
|
5.1
|
%
|
|
Expected
dividend yield
|
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
fair value per option granted
|
|
$
|
8.81
|
|
$
|
9.78
|
|
$
|
6.37
|
|
$
|
6.13
|
|
The
expected term of the options represents the estimated period of time from date
of option grant until exercise and is based on historical experience of similar
awards, giving consideration to the contractual terms, vesting schedules and
expectations of future employee behavior. Expected stock price volatility is
based on a combination of historical volatility and the implied volatility
of
the Company’s traded options. For grants prior to July 3, 2006, expected stock
price volatility was estimated using only the historical volatility of the
Company’s stock. The risk-free interest rate is based on the implied yield
available on U.S. Treasury zero-coupon issues with an equivalent term. The
Company has not paid dividends in the past and does not plan to pay dividends
in
the near future.
On
July
14, 2008, a complaint was filed in California Superior Court naming Peet’s
Coffee & Tea, Inc. as a defendant by Michelle Meyn, Jennifer Kraus and
Angelina Sabatino, on behalf of themselves and all other California store
managers. The complaint alleges that store managers based in California were
not
paid overtime wages, provided meal or rest periods, provided accurate wage
statements and were not reimbursed for business expenses. The plaintiffs seek
injunctive relief, monetary damages, costs and attorneys’ fees, and prejudgment
interests. The Company has not yet been served with this complaint. At this
time, it is not feasible to predict the outcome of or a range of loss, should
a
loss occur, from this proceeding. The Company intends to vigorously defend
against the litigation.
We
are
also subject to a variety of other claims arising in the ordinary course of
our
business, including personal injury claims, contract claims and claims alleging
violations of federal and state law regarding workplace and employment matters,
discrimination and similar matters, and we could become subject to class action
or other lawsuits related to these or different matters in the future.
Currently, the Company is not a party to any legal proceedings that management
believes would have a material adverse effect on the financial position or
results of operations of the Company.
The
Company operates in two reportable segments: retail and specialty sales. Retail
store operations consist of sales of whole bean coffee, beverages, tea and
related products through Company-operated retail stores. Specialty sales consist
of whole bean coffee sales through grocery, home delivery, foodservice and
office coffee accounts. Management evaluates segment performance primarily
based
on revenue and segment operating income. The following table presents certain
financial information for each segment. Segment operating income before taxes
excludes unallocated marketing expenses and general and administrative expenses.
Unallocated assets include cash, coffee inventory in the warehouse, corporate
headquarter assets and intangible and other assets (dollars in
thousands).
|
|
|
Retail
|
|
Specialty
|
|
Unallocated
|
|
Total
|
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
|
Percent
|
|
|
|
|
|
|
of Net
|
|
|
|
of Net
|
|
|
|
|
|
of Net
|
|
|
|
|
Amount
|
|
Revenue
|
|
Amount
|
|
Revenue
|
|
|
|
Amount
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
thirteen weeks ended June 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
46,309
|
|
|
100.0
|
%
|
$
|
23,746
|
|
|
100.0
|
%
|
|
|
|
$
|
70,055
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
20,706
|
|
|
44.7
|
%
|
|
11,534
|
|
|
48.6
|
%
|
|
|
|
|
32,240
|
|
|
46.0
|
%
|
|
Operating
expenses
|
|
|
19,825
|
|
|
42.8
|
%
|
|
4,864
|
|
|
20.5
|
%
|
|
|
|
|
24,689
|
|
|
35.2
|
%
|
|
Depreciation
and amortization
|
|
|
2,509
|
|
|
5.4
|
%
|
|
317
|
|
|
1.3
|
%
|
$
|
350
|
|
|
3,176
|
|
|
4.5
|
%
|
|
Segment
operating income
|
|
|
3,269
|
|
|
7.1
|
%
|
|
7,031
|
|
|
29.6
|
%
|
|
(5,784
|
)
|
|
4,516
|
|
|
6.4
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
202
|
|
|
202
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,718
|
|
|
|
|
|
Total
assets
|
|
|
57,276
|
|
|
|
|
|
14,014
|
|
|
|
|
|
107,444
|
|
|
178,734
|
|
|
|
|
|
Capital
expenditures
|
|
|
3,866
|
|
|
|
|
|
543
|
|
|
|
|
|
1,706
|
|
|
6,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the thirteen weeks ended July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
40,963
|
|
|
100.0
|
%
|
$
|
19,140
|
|
|
100.0
|
%
|
|
|
|
$
|
60,103
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
19,060
|
|
|
46.5
|
%
|
|
9,314
|
|
|
48.7
|
%
|
|
|
|
|
28,374
|
|
|
47.2
|
%
|
|
Operating
expenses
|
|
|
17,987
|
|
|
43.9
|
%
|
|
3,379
|
|
|
17.7
|
%
|
|
|
|
|
21,366
|
|
|
35.5
|
%
|
|
Depreciation
and amortization
|
|
|
2,002
|
|
|
4.9
|
%
|
|
344
|
|
|
1.8
|
%
|
$
|
240
|
|
|
2,586
|
|
|
4.3
|
%
|
|
Segment
operating income
|
|
|
1,914
|
|
|
4.7
|
%
|
|
6,103
|
|
|
31.9
|
%
|
|
(5,597
|
)
|
|
2,420
|
|
|
4.0
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
463
|
|
|
463
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,883
|
|
|
|
|
|
Total
assets
|
|
|
52,600
|
|
|
|
|
|
12,056
|
|
|
|
|
|
96,285
|
|
|
160,941
|
|
|
|
|
|
Capital
expenditures
|
|
|
5,508
|
|
|
|
|
|
295
|
|
|
|
|
|
3,757
|
|
|
9,560
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
twenty-six weeks ended June 29, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
90,918
|
|
|
100.0
|
%
|
$
|
46,272
|
|
|
100.0
|
%
|
|
|
|
$
|
137,190
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
41,062
|
|
|
45.2
|
%
|
|
23,167
|
|
|
50.1
|
%
|
|
|
|
|
64,229
|
|
|
46.8
|
%
|
|
Operating
expenses
|
|
|
38,851
|
|
|
42.7
|
%
|
|
9,367
|
|
|
20.2
|
%
|
|
|
|
|
48,218
|
|
|
35.1
|
%
|
|
Depreciation
and amortization
|
|
|
4,887
|
|
|
5.4
|
%
|
|
657
|
|
|
1.4
|
%
|
$
|
702
|
|
|
6,246
|
|
|
4.6
|
%
|
|
Segment
operating income
|
|
|
6,118
|
|
|
6.7
|
%
|
|
13,081
|
|
|
28.3
|
%
|
|
(11,698
|
)
|
|
7,501
|
|
|
5.5
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
506
|
|
|
506
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,007
|
|
|
|
|
|
Total
assets
|
|
|
57,276
|
|
|
|
|
|
14,014
|
|
|
|
|
|
107,444
|
|
|
178,734
|
|
|
|
|
|
Capital
expenditures
|
|
|
7,853
|
|
|
|
|
|
984
|
|
|
|
|
|
6,106
|
|
|
14,943
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the twenty-six weeks ended July 1, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
$
|
79,986
|
|
|
100.0
|
%
|
$
|
37,630
|
|
|
100.0
|
%
|
|
|
|
$
|
117,616
|
|
|
100.0
|
%
|
|
Cost
of sales and occupancy
|
|
|
37,174
|
|
|
46.5
|
%
|
|
18,390
|
|
|
48.9
|
%
|
|
|
|
|
55,564
|
|
|
47.2
|
%
|
|
Operating
expenses
|
|
|
34,408
|
|
|
43.0
|
%
|
|
6,771
|
|
|
18.0
|
%
|
|
|
|
|
41,179
|
|
|
35.0
|
%
|
|
Depreciation
and amortization
|
|
|
4,143
|
|
|
5.2
|
%
|
|
671
|
|
|
1.8
|
%
|
$
|
502
|
|
|
5,316
|
|
|
4.5
|
%
|
|
Segment
operating income
|
|
|
4,261
|
|
|
5.3
|
%
|
|
11,798
|
|
|
31.4
|
%
|
|
(11,802
|
)
|
|
4,257
|
|
|
3.6
|
%
|
|
Interest
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
888
|
|
|
888
|
|
|
|
|
|
Income
before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,145
|
|
|
|
|
|
Total
assets
|
|
|
52,600
|
|
|
|
|
|
12,056
|
|
|
|
|
|
96,285
|
|
|
160,941
|
|
|
|
|
|
Capital
expenditures
|
|
|
11,796
|
|
|
|
|
|
466
|
|
|
|
|
|
5,898
|
|
|
18,160
|
|
|
|
|
Item
2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this report. Except
for historical information, the discussion in this report contains certain
forward-looking statements that involve risks and uncertainties. We have based
these forward-looking statements on our current expectations and assumptions
about future events. In some cases, you can identify forward-looking statements
by terminology, such as “may,” “should,” “could,” “predict,” “potential,”
“continue,” “expect,” “anticipate,” “future,” “intend,” “plan,” “believe,”
“estimate,” “forecast” and similar expressions (or the negative of such
expressions.) Forward-looking statements are based on our beliefs as well as
assumptions based on information currently available to us, including financial
and operational information, the volatility of our stock price, and current
competitive conditions. As a result, these statements are subject to various
risks and uncertainties. Important factors that could cause actual results
to
differ materially include, but are not limited to, the following:
|
|
·
|
Increases
in the cost and decreases in availability of high quality
Arabica
coffee beans could impact our profitability and growth of our
business.
Although we do not purchase coffee on the commodity markets, price
movements in the commodity trading of coffee impact the prices we
pay.
Coffee is a trade commodity and, in general, its price can fluctuate
depending on: weather patterns in coffee-producing countries; economic
and
political conditions affecting coffee-producing countries; foreign
currency fluctuations; the ability of coffee-producing countries
to agree
to export quotas; and general economic conditions that make commodities
more or less attractive investment options. Over the past two years,
the
commodity cost for coffee has risen above the range it was trading
in for
the prior three to four years. We expect our costs to continue to
rise in
2008. If we are unable to pass along increased coffee costs, our
margin
will decrease and our profitability will decrease accordingly. In
addition, if we are not able to purchase sufficient quantities of
high
quality Arabica beans due to any of the above factors, we may not
be able
to fulfill the demand for our coffee, our revenue may decrease and
our
ability to expand our business may be negatively
impacted.
|
|
|
·
|
Because
we have only one roasting facility, a significant interruption in
the
operation of our roasting and distribution facility could potentially
disrupt our operations.
A
significant interruption in the operation of our roasting and distribution
facility, whether as a result of a natural disaster or other causes,
could
significantly impair our ability to operate our business. Since we
only
roast our coffee to order, we do not carry inventory of roasted coffee
in
our roasting plant. Therefore, a disruption in service in our roasting
facility would impact our sales in our retail and specialty channels
almost immediately. Moreover, our roasting and distribution facility
and
most of our stores are located near several major earthquake faults.
The
impact of a major earthquake on our facilities, infrastructure and
overall
operations is difficult to predict and an earthquake could seriously
disrupt our entire business.
|
For
a
discussion of additional material risks and uncertainties that the Company
faces, see the discussion in the 2007 Form 10-K titled “Risk Factors” as updated
in Item 1A of this Form 10-Q.
Company
Overview and Industry Outlook
Peet’s
Coffee & Tea is a specialty coffee roaster and marketer of fresh,
deep-roasted whole bean coffee sold through multiple channels of
distribution for home and away-from-home enjoyment. Founded in Berkeley,
California in 1966, Peet’s has established a loyal customer base with strong
brand awareness in California. Our growth strategy is based on the
sale of whole bean coffee and high-quality beverages in multiple channels of
distribution including our own retail stores, grocery, home delivery, and office
and foodservice accounts throughout the United States. We believe that our
specialty sales can expand to geographies where we do not have a retail
presence. Our first priority has been to develop primarily in the western U.S.
markets where we already have a presence and have higher customer awareness.
We
expect to continue to open new stores in strategic west coast locations that
meet our demographic profile and partner with distributors and companies who
share our passion for quality and freshness and are willing and able to execute
accordingly in the foodservice and office environment. In grocery, we have
already penetrated most of the grocery market in the western U.S. and in 2007
we
started to expand into the eastern United States. Over the next two to three
years, we plan to distribute to grocery stores nationwide.
We
expect
the specialty coffee industry to continue to grow. We believe that this
growth will be fueled by continued consumer interest in high-quality coffee
and
related products. We believe that by offering high-quality products to
consumers throughout the country, we will attract the same loyal customer base
that we have attracted in California.
As
we
grow, our operations will continue to be vertically integrated, allowing us
to
control the quality of our product at all stages. We purchase high quality
Arabica coffee beans from countries around the world, and we utilize our
artisan-roasting technique to bring out the distinctive flavor of our coffees.
Because roasted coffee is perishable, we are committed to delivering our coffee
under the strictest freshness standards. As a result, we do not stock or
inventory roasted coffee. We roast to order and ship fresh coffee daily to
our
stores and customers. We believe control of purchasing, roasting,
packaging and distribution of our coffee allows us to maintain our commitment
to
freshness, is cost effective, and enhances our margins and profit
potential.
Results
of Operations
The
following discussion on results of operations should be read in conjunction
with
the consolidated financial statements and accompanying notes and the other
financial data included elsewhere in this report.
|
|
|
Thirteen
weeks ended
|
|
Twenty-six
weeks ended
|
|
|
|
|
June
29,
|
|
July
1,
|
|
June
29,
|
|
July
1,
|
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of income as a percent of net revenue:
|
|
|
|
|
|
|
|
|
|
|
Net
revenue
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost
of sales and related occupancy expenses
|
|
|
46.0
|
|
|
47.2
|
|
|
46.8
|
|
|
47.2
|
|
|
Operating
expenses
|
|
|
35.2
|
|
|
35.5
|
|
|
35.1
|
|
|
35.0
|
|
|
General
and administrative expenses
|
|
|
7.8
|
|
|
8.9
|
|
|
8.0
|
|
|
9.6
|
|
|
Depreciation
and amortization expenses
|
|
|
4.5
|
|
|
4.3
|
|
|
4.6
|
|
|
4.5
|
|
|
Income
from operations
|
|
|
6.5
|
|
|
4.1
|
|
|
5.5
|
|
|
3.7
|
|
|
Interest
income
|
|
|
0.3
|
|
|
0.8
|
|
|
0.4
|
|
|
0.8
|
|
|
Income
before income taxes
|
|
|
6.8
|
|
|
4.9
|
|
|
5.9
|
|
|
4.5
|
|
|
Income
tax provision
|
|
|
2.4
|
|
|
1.8
|
|
|
2.1
|
|
|
1.6
|
|
|
Net
income
|
|
|
4.4
|
%
|
|
3.1
|
%
|
|
3.8
|
%
|
|
2.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net revenue by business segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores
|
|
|
66.1
|
%
|
|
68.2
|
%
|
|
66.3
|
%
|
|
68.0
|
%
|
|
Specialty
Sales
|
|
|
33.9
|
|
|
31.8
|
|
|
33.7
|
|
|
32.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
of net revenue by business category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Whole
bean coffee and related products
|
|
|
52.3
|
%
|
|
52.5
|
%
|
|
52.8
|
%
|
|
53.2
|
%
|
|
Beverages
and pastries
|
|
|
47.7
|
|
|
47.5
|
|
|
47.2
|
|
|
46.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and related occupancy expenses as a percent of segment
revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores
|
|
|
44.7
|
%
|
|
46.5
|
%
|
|
45.2
|
%
|
|
46.5
|
%
|
|
Specialty
Sales
|
|
|
48.6
|
|
|
48.7
|
|
|
50.1
|
|
|
48.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses as a percent of segment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Stores
|
|
|
42.8
|
%
|
|
43.9
|
%
|
|
42.7
|
%
|
|
43.0
|
%
|
|
Specialty
Sales
|
|
|
20.5
|
|
|
17.7
|
|
|
20.2
|
|
|
18.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percent
increase/(decrease) from prior year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Revenue
|
|
|
16.6
|
%
|
|
21.0
|
%
|
|
16.6
|
%
|
|
18.3
|
%
|
|
Retail
Stores
|
|
|
13.1
|
|
|
22.0
|
|
|
13.7
|
|
|
19.4
|
|
|
Specialty
Sales
|
|
|
24.1
|
|
|
18.8
|
|
|
23.0
|
|
|
16.1
|
|
|
Cost
of sales and related occupancy expenses
|
|
|
13.6
|
|
|
22.9
|
|
|
15.6
|
|
|
21.0
|
|
|
Operating
expenses
|
|
|
15.6
|
|
|
21.5
|
|
|
17.1
|
|
|
18.7
|
|
|
General
and administrative expenses
|
|
|
1.4
|
|
|
17.1
|
|
|
(2.7
|
)
|
|
20.1
|
|
|
Depreciation
and amortization expenses
|
|
|
22.8
|
|
|
23.4
|
|
|
17.5
|
|
|
30.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected
operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of retail stores in operation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of the period
|
|
|
175
|
|
|
144
|
|
|
166
|
|
|
136
|
|
|
Store
openings
|
|
|
4
|
|
|
8
|
|
|
13
|
|
|
16
|
|
|
Store
closures
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
End
of the period
|
|
|
179
|
|
|
152
|
|
|
179
|
|
|
152
|
|
Thirteen
Weeks Ended June 29, 2008 Compared to Thirteen Weeks Ended July 1,
2007
Net
revenue
Net
revenue for the thirteen weeks ended June 29, 2008 increased $10.0 million,
or
16.6%, versus the same period in 2007 as a result of continued expansion of
our
retail and specialty sales segments. Sales of whole bean and related products
increased 16.3% to $36.7 million. Net revenue from beverages and pastries
increased 16.8% to $33.4 million.
In
the
retail segment, net revenue increased $5.4 million, or 13.1%, compared to the
same period in 2007 primarily as a result of increased sales from the 27 new
stores we opened in the last 12 months
and
growth in the existing stores. During the second quarter of 2008, we opened
4
new stores compared to 8 during the same period in 2007. Sales of whole bean
coffee and related products in the retail segment increased by 4.4% to $12.9
million, while sales of beverages and pastries increased by 16.8% to $33.4
million. The increase in beverage and pastry sales was primarily related to
sales at the stores we opened in 2007 and 2008 and increased traffic in our
existing stores. The slower growth in whole bean and related products was
primarily due to continuing cannibalization of bean sales in retail stores
as we
increased the availability of Peet’s coffee in grocery stores.
In
the
specialty sales segment, net revenue increased $4.6 million, or 24.1%, compared
to the second quarter of 2007. The $4.6 million increase included a $2.7 million
increase in grocery sales and a $2.0 million increase in sales to foodservice
and office accounts. The increase in grocery was equally divided between growth
in our existing accounts in the western U.S. and new business we added in the
eastern U.S. in the last two years. We added approximately 2,200 new grocery
store accounts over the past 12 months, bringing the number of grocery stores
selling Peet’s coffee to approximately 7,200. Net revenue in foodservice and
office coffee sales increased 41.9% primarily due to new foodservice accounts
and efforts in expanding our office distributorships.
Cost
of sales and related occupancy expenses
Cost
of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales decreased from 47.2% in the second quarter of 2007 to
46.0% in the second quarter of 2008. The decrease over last year is due
primarily to procurement savings, cost management in retail, and leverage of
our
roasting facility, partially offset by higher commodity costs, particularly
green coffee, and higher shipping costs.
Operating
expenses
Operating
expenses consist of both retail and specialty operating costs, such as employee
labor and benefits, repairs and maintenance, supplies, training, travel and
banking and card processing fees. Operating expenses as a percent of net revenue
for the second quarter decreased from 35.5% in 2007 to 35.2% in 2008.
In
the
retail segment, operating expenses as a percent of net revenue decreased from
43.9% for the second quarter of 2007 to 42.8% for the second quarter of 2008
primarily due to lower workers compensation insurance and other cost reductions.
As
a
percent of net revenue, specialty operating expenses increased from 17.7% for
the second quarter of 2007 to 20.5% for the second quarter of 2008. The increase
was primarily due to grocery distribution start-up costs for our expansion
in
the East.
General
and administrative expenses
General
and administrative expenses were $5.4 million for the second quarter of 2008
consistent with the same period last year, resulting in 1.0% percent of net
revenue improvement due to leverage of our existing overhead.
Depreciation
and amortization expenses
Depreciation
and amortization expenses increased in the second quarter of 2008 from $2.6
million to $3.2 million primarily due to the 35 stores we opened in the last
15
months.
Interest
income
We
currently invest in U.S. government, agency, municipal and guaranteed student
loan obligations. Interest income includes interest income and gains or losses
from the sale of these instruments. We earned $0.2 million in interest income
in
the second quarter of 2008, compared to $0.5 million last year. The difference
was due to lower yields during the second quarter of 2008 compared to the same
period in 2007.
Income
tax provision
The
effective income tax rate for the second quarter of 2008 is 35.7% compared
to
37.5% during the second quarter of 2007. The lower effective tax rate is
primarily due to generation of wage related tax credits and a lower effective
state tax rate.
The
Company does not expect the unrecognized tax benefits to change significantly
within the next 12 months.
Twenty-six
Weeks Ended June 29, 2008 Compared to Twenty-six Weeks Ended July 1,
2007
Net
revenue
Net
revenue for the twenty-six weeks ended June 29, 2008 increased $19.6 million,
or
16.6%, versus the same period in 2007 as a result of continued expansion of
our
retail and specialty sales segments. Sales of whole bean and related products
increased 15.9% to $72.5 million. Net revenue from beverages and pastries
increased 17.5% to $64.7 million.
In
the
retail segment, net revenue increased $10.9 million, or 13.7%, compared to
the
same period in 2007 primarily as a result of increased sales from the 27 new
stores we opened in the last 12 months and growth in the existing stores. During
the first half of 2008, we opened 13 new stores compared to 16 during the same
period in 2007. Sales of whole bean coffee and related products in the retail
segment increased by 5.3% to $26.2 million, while sales of beverages and
pastries increased by 17.5% to $64.7 million. The increase in beverage and
pastry sales was primarily related to sales at the stores we opened in 2007
and
2008 and increased traffic in our existing stores. The slower growth in whole
bean and related products was primarily due to continuing cannibalization of
bean sales in retail stores as we increased the availability of Peet’s coffee in
grocery stores.
In
the
specialty sales segment, net revenue increased $8.6 million, or 23.0%, compared
to the same period in 2007. The $8.6 million increase included a $5.3 million
increase in grocery sales and a $3.4 million increase in sales to foodservice
and office accounts. The increase in grocery was equally divided between growth
in our existing accounts in the western U.S. and new business we added in the
eastern U.S. in the last two years. Net revenue in foodservice and office coffee
sales increased 35.7% primarily due to new foodservice accounts and efforts
in
expanding our office distributorships.
Cost
of sales and related occupancy expenses
Cost
of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales decreased from 47.2% for the twenty-six weeks ended
July
1, 2007 to 46.8% for same period in 2008. The decrease over last year is due
primarily to procurement savings, cost management in retail, and leverage of
our
roasting facility, partially offset by higher commodity costs, particularly
green coffee and milk, and higher shipping costs.
Operating
expenses
Operating
expenses consist of both retail and specialty operating costs, such as employee
labor and benefits, repairs and maintenance, supplies, training, travel and
banking and card processing fees. Operating expenses as a percent of net revenue
for the twenty-six week period increased from 35.0% in 2007 to 35.1% in 2008.
In
the
retail segment, operating expenses as a percent of net revenue for the
twenty-six week period decreased from 43.0% in 2007 to 42.7% in 2008 primarily
due to cost reductions, partially offset by the impact from new stores opened
in
the last two years.
As
a
percent of net revenue, specialty operating expenses increased from 18.0% for
the twenty-six weeks ended July 1, 2007 to 20.2% for the twenty-six weeks ended
June 29, 2008. The increase was primarily due to grocery distribution start-up
costs for our expansion in the East.
General
and administrative expenses
General
and administrative expenses for the twenty-six weeks ended June 29, 2008 were
$11.0 million, or 8.0% of net revenue, compared to $11.3 million, or 9.6% of
net
revenue, for the same period last year. Professional fees associated with our
stock option review and related lawsuit were $1.0 million for the twenty-six
weeks ended July 1, 2007 and were less than $0.1 in 2008.
Depreciation
and amortization expenses
Depreciation
and amortization expenses for the twenty-six weeks ended June 29, 2008 increased
from $5.3 million to $6.2 million primarily due to the 35 stores we opened
in
the last 15 months.
Interest
income
We
currently invest in U.S. government, agency, municipal and guaranteed student
loan obligations. Interest income includes interest income and gains or losses
from the sale of these instruments. We earned $0.5 million in interest income
in
the twenty-six week period in 2008, compared to $0.9 million in the same period
last year. The difference was due to lower yields in 2008.
Income
tax provision
The
effective income tax rate for the twenty-six week period in 2008 is 36.0%
compared to 37.5% during the same period last year. The lower effective
tax rate is primarily due to generation of wage related tax credits and a lower
effective state tax rate.
The
Company does not expect the unrecognized tax benefits to change significantly
within the next 12 months.
Liquidity
and Capital Resources
At
June
29, 2008 we had $7.1 million in cash and cash equivalents and $11.0 million
in
short-term marketable securities for a total of $18.1 million. Working capital
was $36.9 million as of June 29, 2008.
Net
cash
provided by operations was $9.6 million for the twenty-six weeks ended June
29,
2008 compared to $2.9 million for the same prior year period. Operating cash
flows were positively impacted by higher net income, net of depreciation
expense, timing of coffee purchases compared to the corresponding prior year
period, and other changes in working capital.
Net
cash
used in investing activities was $10.3 million for the twenty-six weeks ended
June 29, 2008 compared to $13.3 million in the prior year. Investing activities
primarily relate to purchases of property and equipment and maturities and
purchases of marketable securities. During the twenty-six weeks period ended
June 29, 2008, we purchased property and equipment totaling $14.9 million
primarily related to new stores, the conversion of our previous roasting
facility into office space, and information technology support systems and
other
software and hardware to support our growing infrastructure. Proceeds from
maturities net of purchases of marketable securities totaled $4.7
million.
Net
cash
used by financing activities for the twenty-six weeks ended June 29, 2008 was
$7.6 million primarily from the repurchase of our common stock, offset by
proceeds from stock option exercises.
For
the
next 12 months, we expect our cash flows from operations and cash and marketable
securities to be sufficient for our operating and capital requirements, our
share purchase program and our contractual obligations as they come
due.
Item
3. Quantitative and Qualitative Disclosures about Market
Risk
We
invest
excess cash in interest-bearing, U.S. government, agency, municipal and
guaranteed student loan obligations. These financial instruments are all subject
to fluctuations of daily interest rates. Therefore our investment portfolio
is
exposed to market risk from these changes.
The
supply and price of coffee are subject to significant volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee bean prices have
been affected in the past, and may be affected in the future, by the actions
of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee beans through agreements establishing
export quotas or restricting coffee supplies worldwide.
We
currently use fixed-price purchase commitments, but in the past have used and
may potentially in the future use coffee futures and coffee futures options
to
manage coffee supply and price risk.
Fixed-Price
and Not-Yet-Priced Purchase Commitments
We
enter
into fixed-price purchase commitments in order to secure an adequate supply
of
quality green coffee beans and fix our cost of green coffee beans. These
commitments are made with established coffee brokers and are denominated in
U.S.
dollars. We also enter into “not-yet-priced” commitments based on a fixed
premium over the New York “C” market with the option to fix the price at any
time. As of June 29, 2008, we had approximately $27.5 million in open
fixed-priced purchase commitments and approximately $7.5 million in
not-yet-priced commitments for a total of approximately $35.0 million with
delivery dates ranging from July 2008 through July 2011. We believe, based
on
relationships established with our suppliers, that the risk of non-delivery
on
such purchase commitments is low.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
As
of
June 29, 2008, the end of the period covered by this report, we carried out
an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective at the reasonable-assurance level.
There
have been no changes in our internal controls over financial reporting during
the fiscal quarter ended June 29, 2008 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
On
July
14, 2008, a complaint was filed in California Superior Court naming Peet’s
Coffee & Tea, Inc. as a defendant by Michelle Meyn, Jennifer Kraus and
Angelina Sabatino, on behalf of themselves and all other California store
managers. The complaint alleges that store managers based in California were
not
paid overtime wages, provided meal or rest periods, provided accurate wage
statements and were not reimbursed for business expenses. The plaintiffs seek
injunctive relief, monetary damages, costs and attorneys’ fees, and prejudgment
interests. The Company has not yet been served with this complaint. At this
time, it is not feasible to predict the outcome of or a range of loss, should
a
loss occur, from this proceeding. The Company intends to vigorously defend
against the litigation.
We
are
also subject to a variety of other claims arising in the ordinary course of
our
business, including personal injury claims, contract claims and claims alleging
violations of federal and state law regarding workplace and employment matters,
discrimination and similar matters, and we could become subject to class action
or other lawsuits related to these or different matters in the future.
Regardless of whether any claims against us are valid, or whether we are
ultimately held liable, claims may be expensive to defend and may divert time
and money away from our operations and hurt our performance.
Item
1A. Risk Factors
In
addition to the risks and uncertainties discussed in the 2007 Form 10-K under
“Risk Factors”, you should be aware of the following risk factor:
Complaints
or claims by current, former or prospective employees could adversely affect
us.
We
are
subject to the a variety of laws and regulations which govern such matters
as
minimum wages, overtime and other working conditions, various family leave
mandates and a variety of other laws enacted, or rules and regulations
promulgated, by federal, state and local governmental authorities that govern
these and other employment matters. We have been, and in the future may be,
the
subject of complaints or litigation from current, former or prospective
employees. In addition, successful complaints against our competitors may
spur similar lawsuits against us. For instance, in 2003, two lawsuits
(which have since been settled) were filed against the Company alleging
misclassification of employment position and sought damages, restitution,
reclassification and attorneys’ fees and costs. In addition, on July 14,
2008, a complaint was filed alleging that store managers based in California
were not paid overtime wages, provided meal or rest periods, provided accurate
wage statements and were not reimbursed for business expenses. These types
of
claims and litigation involving current, former or prospective employees could
divert our management’s time and attention from our business operations and
might potentially result in substantial costs of defense, settlement or other
disposition, which could have a material adverse effect on our results of
operations in one or more fiscal periods.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Repurchases
of Equity Securities
|
Period
|
|
Total Number of Shares
Purchased
|
|
Average Price Paid per
Share
|
|
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans
or Programs (1)
|
|
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
|
|
|
June 2,
2008 – June 29, 2008
|
|
|
358,869
|
|
$
|
23.06
|
|
|
358,869
|
|
|
641,131
|
|
|
Total
|
|
|
358,869
|
|
$
|
23.06
|
|
|
358,869
|
|
|
641,131
|
|
|
|
(1)
|
All
repurchases were made pursuant a stock repurchase program announced
on
September 6, 2006 providing for the repurchase of up to one million
shares
of the Company’s common stock with no deadline for completion.
|
Item
4. Submission of Matters to a Vote of Security Holders
The
2008
Annual Meeting of Stockholders of the Company was held on May 21, 2008. Patrick
J. O’Dea was elected as proposed in the proxy statement pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, to serve as a director
until the Company's Annual Meeting in 2011 and until his successor is elected
and qualified. There were 13,153,763 votes cast in the election of directors.
The voting regarding each nominee was as follows:
|
|
|
For
|
|
Withheld
|
|
Non-votes
|
|
|
|
|
|
|
|
|
|
|
|
Patrick
J. O’Dea
|
|
|
12,816,766
|
|
|
336,997
|
|
|
806,453
|
|
The
following directors' term of office as a director continued after the meeting:
Gerald Baldwin, Hilary Billings, Elizabeth Sartain, David Deno, Michael Linton,
and Jean-Michel Valette.
Further,
the selection of Deloitte & Touche LLP as independent registered public
accountants for the fiscal year was ratified. The matter was approved with
12,991,563 votes for, 153,732 votes withheld, and 8,468 votes abstained. Of
the
total shares outstanding on the date of record, 806,453 shares were not
voted.
Item
6. Exhibits
|
|
Exhibit
|
|
Description
|
|
|
31.1
|
|
Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
31.2
|
|
Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
|
32.1
|
|
Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
|
|
|
32.2
|
|
Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to
Section 906 of Sarbanes-Oxley Act of
2002.
|
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf
by
the undersigned, thereunto duly authorized.
|
|
PEET’S
COFFEE & TEA, INC.
|
|
|
|
|
Date:
August 7, 2008
|
By:
|
/s/ Thomas
P. Cawley
|
|
|
|
Thomas
P. Cawley
|
|
|
|
Vice
President, Chief Financial Officer and
Secretary
|
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