PEET Peets Coffee & Tea, Inc. (MM)

Peet's Coffee & Tea Inc. (PEET) reported second quarter 2011 diluted earnings per share of 38 cents, up 23% versus 2010 proforma diluted earnings per share of 31 cents. It also surpassed the Zacks Consensus Estimate of 32 cents by 18.75%.

The company Expects 2011 full-year diluted earnings per share to be toward the higher end of the previous guidance range of $1.43 to $1.50.

Revenues and Operating Profits

Net revenue climbed 12% to $90.6 million from $80.8 million for the corresponding period of fiscal 2010. Strong sales growth was fuelled by grocery business that was at its strongest at 30% for this quarter. Revenues also surpassed Zacks Consensus Estimate of $88.0 million.

Management stated that the quarter marked strong fundamentals with strong business growth. There was good sales growth across all channels. With excellent overall cost management, the company reported first quarter operating margin of 8.8%.

The company expects full-year total net revenue growth to be in the range of 10% to 12%.

Cost of sales was 49.2% of total net revenue, compared to 46.3% last year. The increase resulted primarily from higher coffee costs and to a lesser extent higher milk costs and a mix shift towards the specialty business, which has a higher cost of sales. Price increases across the channels and lower shipping expenses partially offset the impact of these higher costs.

Operating expenses as a percentage of net revenue came down to 31.1% from 33.3% last year, owing to a favorable mix shift to the specialty business, the impact of price increases across all channels, leveraging the retail overhead costs, and lower training expenses in retail stores.

Segment Details

Retail net sales inched up 6% to $53.4 million for the first quarter 2011, from $50.6 million a year ago. The growth was attributable to sales growth in existing stores. Operating income for Retail climbed 21.6% year over year to $6.5 million.

Specialty segment’s net revenue climbed 23% to $37.3 million for the quarter, compared to $30.2 million for the corresponding period of fiscal 2010. Grocery business grew 30% over last year; the foodservice and office business grew 19%; and home delivery net revenue grew 2%. Specialty segment reported operating income of $8.2 million, 5.7% higher than the year ago period.

Management sees momentum and plenty of new growth opportunities for the company. It expects to make up for most of the year-over-year coffee cost increase in the years to come.

Recommendation

Peet’s Coffee & Tea is a growing company. The company’s high quality standard and its variety are maintained by its vertically integrated business model. However, the highly competitive nature of specialty coffee category, presence of strong competitors like Coca-Cola Enterprises Inc. (CCE) and Starbucks Corporation (SBUX) and the vulnerability of coffee prices to weather and damage by pest concern us.

Currently, we prefer to rate the stock as Neutral. Further, Supervalu (SVU) holds the Zacks #2 Rank, which translates into a short-term Buy rating.

 
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