- Quarterly Report (10-Q)

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 September 28, 2008

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES 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)

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 o .

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 November 2, 2008, 13,554,251 shares of registrant’s Common Stock were outstanding.

	INDEX
		Page
PART I	FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	14
Item 4.	Controls and Procedures	15

PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	15
Item 1A.	Risk Factors	15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 6.	Exhibits	17
	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)

	September 28,		December 30,
	2008		2007

ASSETS

Current assets
Cash and cash equivalents	$	3,889	$	15,312
Short-term marketable securities		10,893		7,932
Accounts receivable, net		9,642		8,287
Inventories		29,698		24,483
Deferred income taxes - current		2,937		2,950
Prepaid expenses and other		9,806		4,285
Total current assets		66,865		63,249

Long-term marketable securities		-		7,831
Property, plant and equipment, net		107,564		99,231
Deferred income taxes - non current		3,000		3,353
Other assets, net		3,893		3,883

Total assets	$	181,322	$	177,547

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and other accrued liabilities	$	9,934	$	10,104
Accrued compensation and benefits		10,470		8,909
Deferred revenue		4,477		5,856
Total current liabilities		24,881		24,869

Deferred lease credits and other long-term liabilities		7,030		5,425
Total liabilities		31,911		30,294

Shareholders' equity
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding:13,653,000 and 13,932,000 shares		99,662		104,616
Accumulated other comprehensive income		19		52
Retained earnings		49,730		42,585

Total shareholders' equity		149,411		147,253

Total liabilities and shareholders' equity	$	181,322	$	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				Thirty-nine weeks ended
	September 28,		September 30,		September 28,		September 30,
	2008		2007		2008		2007

Retail stores	$	45,911	$	41,450	$	136,829	$	121,436
Specialty sales		22,575		19,410		68,847		57,040
Net revenue		68,486		60,860		205,676		178,476

Cost of sales and related occupancy expenses		32,249		29,142		96,478		84,706
Operating expenses		24,715		21,593		72,934		62,772
General and administrative expenses		5,237		4,928		16,233		16,228
Depreciation and amortization expenses		3,150		2,619		9,395		7,935
Total costs and expenses from operations		65,351		58,282		195,040		171,641

Income from operations		3,135		2,578		10,636		6,835

Interest income		130		284		636		1,172

Income before income taxes		3,265		2,862		11,272		8,007

Income tax provision		1,247		1,026		4,127		2,953

Net income	$	2,018	$	1,836	$	7,145	$	5,054

Net income per share:
Basic	$	0.15	$	0.13	$	0.52	$	0.37
Diluted	$	0.15	$	0.13	$	0.51	$	0.36

Shares used in calculation of net income per share:
Basic		13,603		13,816		13,825		13,664
Diluted		13,899		14,168		14,111		14,057

See notes to consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Thirty-nine weeks ended
	September 28,			September 30,
	2008			2007

Cash flows from operating activities:
Net income	$	7,145		$	5,054
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		11,025			9,376
Amortization of interest purchased		157			177
Stock-based compensation		1,962			2,116
Excess tax benefit from exercise of stock options		(384	)		(1,279	)
Tax benefit from exercise of stock options		246			1,166
Loss on disposition of assets and asset impairment		216			122
Deferred income taxes		366			(186	)
Changes in other assets and liabilities:
Accounts receivable, net		(1,355	)		(650	)
Inventories		(5,215	)		(8,823	)
Prepaid expenses and other current assets		(5,521	)		(3,997	)
Other assets		(81	)		34
Accounts payable, accrued liabilities and deferred revenue		872			4,027
Deferred lease credits and other long-term liabilities		1,605			1,394
Net cash provided by operating activities		11,038			8,531

Cash flows from investing activities:
Purchases of property, plant and equipment		(20,430	)		(25,804	)
Proceeds from sales of property, plant and equipment		67			22
Proceeds from sales and maturities of marketable securities		5,597			26,144
Purchases of marketable securities		(917	)		(21,688	)
Net cash used in investing activities		(15,683	)		(21,326	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		2,855			5,885
Purchase of common stock		(10,017	)		-
Excess tax benefit from exercise of stock options		384			1,279
Net cash (used in)/provided by financing activities		(6,778	)		7,164

Decrease in cash and cash equivalents		(11,423	)		(5,631	)
Cash and cash equivalents, beginning of period		15,312			7,692

Cash and cash equivalents, end of period	$	3,889		$	2,061

Non-cash investing activities:
Capital expenditures incurred, but not yet paid	$	1,135		$	1,741
Other cash flow information:
Cash paid for income taxes		7,670			5,066

See notes to consolidated financial statements.

Peet’s Coffee & Tea, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED

1.	Basis of Presentation

The accompanying consolidated financial statements of Peet’s Coffee & Tea, Inc. and its subsidiaries (collectively, the “Company” or “Peet’s”) as of September 28, 2008 and for the thirteen and thirty-nine weeks ended September 28, 2008 and September 30, 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 thirty-nine weeks ended September 28, 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 September 28, 2008 and September 30, 2007, comprehensive income was $1,951,000 and $1,905,000, respectively. For the thirty-nine weeks ended September 28, 2008 and September 30, 2007, comprehensive income was $7,112,000 and $5,115,000, 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 1,311,586 and 1,070,226 have been excluded from diluted weighted average shares outstanding for the thirteen week periods ended September 28, 2008 and September 30, 2007, respectively, and 1,226,647 and 965,406 for the thirty-nine 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				39 weeks ended
	September 28, 2008		September 30, 2007		September 28, 2008		September 30, 2007

Basic weighted average shares outstanding		13,603		13,816		13,825		13,664
Incremental shares from assumed exercise of stock options		296		352		286		393
Diluted weighted average shares outstanding		13,899		14,168		14,111		14,057

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):

	September 28,
	2008
Short-term marketable securities	$	10,893
Restricted cash (included in other assets, net)		3,319
	$	14,212

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.

3.	Inventories

The Company’s inventories consist of the following (in thousands):

	September 28,		December 30,
	2008		2007
Green coffee	$	21,552	$	15,421
Other inventory		8,146		9,062
Total	$	29,698	$	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 and thirty-nine weeks ended September 28, 2008, the Company purchased and retired 80,979 and 439,848 shares of common stock, respectively, at an average price of $21.49 and $22.78, respectively, in accordance with the stock purchase program.

Subsequent to quarter-end, on October 27, 2008, the Board of Directors approved a stock purchase program providing for the additional purchase of up to one million shares of the Company’s common stock, with no deadline for completion. Purchases under the program would be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.

5.	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				Thirty-nine weeks ended
	September 28,		September 30,		September 28,		September 30,
	2008		2007		2008		2007

Stock-based compensation expense	$	577	$	603	$	1,766	$	1,906
ESPP expense		88		68		195		210
Total	$	664	$	671	$	1,962	$	2,116

Cost of sales and related occupancy expenses	$	49	$	60	$	153	$	174
Operating expenses		319		246		909		725
General and administrative expenses		296		365		901		1,217
Total	$	664	$	671	$	1,962	$	2,116

Tax benefit	$	271	$	273	$	800	$	862

Estimated fair value per option granted	$	8.82	$	9.79	$	5.58	$	5.56

6.	Legal Proceedings

On July 14, 2008, a complaint was filed against Peet’s Coffee & Tea, Inc. in California Superior Court, Alameda County, by three former employees 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, penalties, costs and attorneys’ fees, and prejudgment interest. On October 8, 2008, the Company filed an answer denying the allegations set forth in the complaint and asserting a number of affirmative defenses thereto. 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.

7.	Segment Information

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 and roasting facility assets, 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 the thirteen weeks ended September 28, 2008
Net revenue	$	45,911		100.0	%	$	22,575		100.0	%				$	68,486		100.0	%
Cost of sales and occupancy		21,130		46.0	%		11,119		49.3	%					32,249		47.1	%
Operating expenses		19,940		43.4	%		4,775		21.2	%					24,715		36.1	%
Depreciation and amortization		2,357		5.1	%		372		1.6	%	$	421			3,150		4.6	%
Segment operating income		2,484		5.4	%		6,309		27.9	%		(5,658	)		3,135		4.6	%
Interest income												130			130
Income before income taxes															3,265
Total assets		59,800					14,854					106,667			181,321
Capital expenditures		2,204					621					2,663			5,487

For the thirteen weeks ended September 30, 2007
Net revenue	$	41,450		100.0	%	$	19,410		100.0	%				$	60,860		100.0	%
Cost of sales and occupancy		19,510		47.1	%		9,632		49.6	%					29,142		47.9	%
Operating expenses		18,109		43.7	%		3,484		17.9	%					21,593		35.5	%
Depreciation and amortization		2,075		5.0	%		314		1.6	%	$	230			2,619		4.3	%
Segment operating income		1,756		4.2	%		5,980		30.8	%		(5,158	)		2,578		4.2	%
Interest income												284			284
Income before income taxes															2,862
Total assets		55,641					13,162					102,895			171,698
Capital expenditures		5,874					328					1,442			7,644

For the thirty-nine weeks ended September 28, 2008
Net revenue	$	136,829		100.0	%	$	68,847		100.0	%				$	205,676		100.0	%
Cost of sales and occupancy		62,191		45.5	%		34,287		49.8	%					96,478		46.9	%
Operating expenses		58,791		43.0	%		14,143		20.5	%					72,934		35.5	%
Depreciation and amortization		7,244		5.3	%		1,029		1.5	%	$	1,122			9,395		4.6	%
Segment operating income		8,603		6.3	%		19,388		28.2	%		(17,355	)		10,636		5.2	%
Interest income												636			636
Income before income taxes															11,272
Total assets		59,800					14,854					106,667			181,321
Capital expenditures		10,057					1,605					8,769			20,430

For the thirty-nine weeks ended September 30, 2007
Net revenue	$	121,436		100.0	%	$	57,040		100.0	%				$	178,476		100.0	%
Cost of sales and occupancy		56,684		46.7	%		28,022		49.1	%					84,706		47.5	%
Operating expenses		52,517		43.2	%		10,255		18.0	%					62,772		35.2	%
Depreciation and amortization		6,218		5.1	%		985		1.7	%	$	732			7,935		4.4	%
Segment operating income		6,017		5.0	%		17,778		31.2	%		(16,960	)		6,835		3.8	%
Interest income												1,172			1,172
Income before income taxes															8,007
Total assets		55,641					13,162					102,895			171,698
Capital expenditures		17,669					794					7,341			25,804

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. 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 Part II 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, we expect 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						Thirty-nine weeks ended
	September 28,			September 30,			September 28,			September 30,
	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		47.1			47.9			46.9			47.5
Operating expenses		36.1			35.5			35.5			35.2
General and administrative expenses		7.6			8.1			7.9			9.1
Depreciation and amortization expenses		4.6			4.3			4.6			4.4
Income from operations		4.6			4.2			5.1			3.8
Interest income		0.2			0.5			0.3			0.7
Income before income taxes		4.8			4.7			5.4			4.5
Income tax provision		1.8			1.7			2.0			1.7
Net income		3.0	%		3.0	%		3.4	%		2.8	%

Percent of net revenue by business segment:
Retail Stores		67.0	%		68.1	%		66.5	%		68.0	%
Specialty Sales		33.0			31.9			33.5			32.0

Percent of net revenue by business category:
Whole bean coffee and related products		51.3	%		51.8	%		52.3	%		52.7	%
Beverages and pastries		48.7			48.2			47.7			47.3

Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail Stores		46.0	%		47.1	%		45.5	%		46.7	%
Specialty Sales		49.3			49.6			49.8			49.1

Operating expenses as a percent of segment revenue:
Retail Stores		43.4	%		43.7	%		43.0	%		43.2	%
Specialty Sales		21.2			17.9			20.5			18.0

Percent increase from prior year:
Net Revenue		12.5	%		19.6	%		15.2	%		18.8	%
Retail Stores		10.8			20.7			12.7			19.8
Specialty Sales		16.3			17.5			20.7			16.6
Cost of sales and related occupancy expenses		10.7			21.0			13.9			21.0
Operating expenses		14.5			19.0			16.2			18.8
General and administrative expenses		6.3			7.3			-			15.9
Depreciation and amortization expenses		20.3			18.2			18.4			26.1

Selected operating data:
Number of retail stores in operation
Beginning of the period		179			152			166			136
Store openings		3			7			16			23
Store closures		(1	)		-			(1	)		-
End of the period		181			159			181			159

Thirteen Weeks Ended September 28, 2008 Compared to Thirteen Weeks Ended September 30, 2007

Net revenue

Net revenue for the thirteen weeks ended September 28, 2008 increased $7.6 million, or 12.5%, 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 11.5% to $35.1 million. Net revenue from beverages and pastries increased 13.6% to $33.4 million.

In the retail segment, net revenue increased $4.5 million, or 10.8%, compared to the same period in 2007 primarily as a result of increased sales from the 23 new stores we opened in the last 12 months. During the third quarter of 2008, we opened 3 new stores compared to 7 during the same period in 2007. Sales of whole bean coffee and related products in the retail segment increased by 3.8% to $12.6 million, while sales of beverages and pastries increased by 13.6% 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 $3.2 million, or 16.3%, compared to the third quarter of 2007. The $3.2 million increase included a $1.5 million increase in grocery sales and a $1.8 million increase in sales to foodservice and office accounts, offset by a $0.1 million decline in home delivery sales. The increase in grocery was primarily due to new business we added in the eastern U.S. in the last two years. We added approximately 2,300 new grocery store accounts over the past 12 months, bringing the number of grocery stores selling Peet’s coffee to approximately 7,400. Net revenue in foodservice and office coffee sales increased 34.3% 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 47.9% in the third quarter of 2007 to 47.1% in the third quarter of 2008. The decrease over last year is due primarily to procurement savings, increased prices in retail and grocery, and leverage of costs related to our roasting facility that opened last year, partially offset by higher green coffee and 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 third quarter increased from 35.5% in 2007 to 36.1% in 2008.

In the retail segment, operating expenses as a percent of net revenue decreased from 43.7% for the third quarter of 2007 to 43.4% for the third quarter of 2008 primarily due to lower workers compensation insurance and leverage of retail overhead costs, offset by higher store expenses.

As a percent of net revenue, specialty operating expenses increased from 17.9% for the third quarter of 2007 to 21.2% for the third 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 $5.2 million for the third quarter of 2008 compared to $4.9 million for the same period last year due to additional headcount and other investments to support our growth.

Depreciation and amortization expenses

Depreciation and amortization expenses increased in the third quarter of 2008 from $2.6 million to $3.2 million primarily due to the 30 stores we opened in the last 15 months.

Interest income

We 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 $0.1 million in interest income in the third quarter of 2008, compared to $0.3 million for the same period last year. The difference was due to lower average cash balances and lower yields during the third quarter of 2008 compared to the same period in 2007.

Income tax provision

The effective income tax rate for the third quarter of 2008 is 38.2% compared to 35.8% during the third quarter of 2007 due to normal quarter to quarter rate fluctuations.

The Company does not expect the unrecognized tax benefits to change significantly within the next 12 months.

Thirty-nine Weeks Ended September 28, 2008 Compared to Thirty-nine Weeks Ended September 30, 2007

Net revenue

Net revenue for the thirty-nine weeks ended September 28, 2008 increased $27.2 million, or 15.2%, 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 14.4% to $107.6 million. Net revenue from beverages and pastries increased 16.1% to $98.1 million.

In the retail segment, net revenue increased $15.4 million, or 12.7%, compared to the same period in 2007 primarily as a result of increased sales from the 23 new stores we opened in the last 12 months. During thirty-nine weeks ended September 28, 2008, we opened 16 new stores compared to 23 during the same period in 2007. Sales of whole bean coffee and related products in the retail segment increased by 4.9% to $38.8 million, while sales of beverages and pastries increased by 16.1% to $98.1 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 $11.8 million, or 20.7%, compared to the same period in 2007. The $11.8 million increase included a $6.8 million increase in grocery sales and a $5.2 million increase in sales to foodservice and office accounts, offset by a $0.2 million decline in home delivery sales. The increase in grocery was due to 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 35.2% 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 47.5% for the thirty-nine weeks ended September 30, 2007 to 46.9% for same period in 2008. The decrease over last year is due primarily to procurement savings, increased prices in retail and grocery, and leverage of costs related to our roasting facility that opened last year, partially offset by higher green coffee and 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 thirty-nine week period increased from 35.2% in 2007 to 35.5% in 2008.

In the retail segment, operating expenses as a percent of net revenue for the thirty-nine week period decreased from 43.2% in 2007 to 43.0% in 2008 primarily due to lower workers compensation insurance and leverage of retail overhead costs, 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 thirty-nine weeks ended September 30, 2007 to 20.5% for the thirty-nine weeks ended September 28, 2008. The increase was primarily due to grocery distribution start-up costs for our expansion in the eastern U.S.

General and administrative expenses

General and administrative expenses for the thirty-nine weeks ended September 28, 2008 were $16.2 million, or 7.9% of net revenue, compared to $16.2 million, or 9.1% of net revenue, for the same period last year. Professional fees associated with our stock option review and related lawsuit were $1.2 million for the thirty-nine weeks ended September 30, 2007 and were less than $0.1 million for the same period in 2008. Excluding the 2007 stock option review related fees, the increase in general and administrative expenses was due primarily to increased marketing expenses, additional headcount and other investments to support our growth.

Depreciation and amortization expenses

Depreciation and amortization expenses for the thirty-nine weeks ended September 28, 2008 increased from $7.9 million to $9.4 million primarily due to the 30 stores we opened in the last 15 months.

Interest income

We 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 $0.6 million in interest income in the thirty-nine week period in 2008, compared to $1.2 million in the same period last year. The difference was due primarily to lower yields and to a lesser extent a lower average cash balance during the thirty-nine weeks ended September 28, 2008.

Income tax provision

The effective income tax rate for the thirty-nine week period in 2008 is 36.6% compared to 36.9% during the same period last year.

The Company does not expect the unrecognized tax benefits to change significantly within the next 12 months.

Liquidity and Capital Resources

At September 28, 2008 we had $3.9 million in cash and cash equivalents and $10.9 million in short-term marketable securities for a total of $14.8 million. Working capital was $42.0 million as of September 28, 2008.

Net cash provided by operations was $11.0 million for the thirty-nine weeks ended September 28, 2008 compared to $8.5 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 $15.7 million for the thirty-nine weeks ended September 28, 2008 compared to $21.3 million in the prior year. Investing activities primarily relate to purchases of property, plant and equipment and maturities and purchases of marketable securities. During the thirty-nine week period ended September 28, 2008, we purchased property, plant and equipment totaling $20.4 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 thirty-nine weeks ended September 28, 2008 was $6.8 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 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 September 28, 2008, we had approximately $36.6 million in open fixed-priced purchase commitments and approximately $1.3 million in not-yet-priced commitments for a total of approximately $37.9 million with delivery dates ranging from October 2008 through July 2012. 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 September 28, 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 September 28 , 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

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 factors:

Complaints or claims by current, former or prospective employees could adversely affect us.

We are subject to 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.

A worsening of the United States and global economy could materially adversely affect our business.

Our revenues and performance depend significantly on consumer confidence and spending, which have recently deteriorated due to current worldwide economic conditions and may remain depressed for the foreseeable future. Some of the factors that could influence the levels of consumer confidence and spending include, without limitation, continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results.

Item 2. Unregistered Sales o f 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 30, 2008 – August 3, 2008		80,979	$	21.49		439,848		560,152
Total		80,979	$	21.49		439,848		560,152

(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.

(2)

Item 6. Exhibits

	Exhibit		Description
	3.1		Amended and Restated Articles of Incorporation.*
	3.2		Amended and Restated Bylaws.*
	4.1		Form of common stock certificate.*
	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.

* Incorporated by reference to the Registrant’s Information Statement of Form S-1 (File No. 333-47957) filed on October 13, 2000, as subsequently amended.

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: November 6, 2008	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Vice President, Chief Financial Officer and Secretary

Peets Coffee & Tea, Inc. (MM) (NASDAQ:PEET)
Historical Stock Chart
From Jun 2024 to Jul 2024

Click Here for more Peets Coffee & Tea, Inc. (MM) Charts.

Peets Coffee & Tea, Inc. (MM) (NASDAQ:PEET)
Historical Stock Chart
From Jul 2023 to Jul 2024

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

PEET Peets Coffee & Tea, Inc. (MM)

News

Your Recent History

Company

Business

Popular

Get The App

Trending Now

Toplists

Market Data

News

Trading Tools

Markets

Discover

Hot Features

Follow Feed

Options Flow

Monitor

PEET Peets Coffee & Tea, Inc. (MM)

News

Your Recent History

Company

Business

Popular

Get The App