PEET Peets Coffee & Tea, Inc. (MM)

Peet's Coffee & Tea Inc. (PEET) reported third quarter 2011 earnings per share of 28 cents, which surpassed the Zacks Consensus Estimate by a penny. The results were in line with the prior-year period earnings.

Including the anticipated settlement and legal costs of a class action lawsuit of $2.2 million after tax, reported earnings came in at 11 cents per share in the third-quarter of 2011 versus 28 cents.

The company affirms its 2011 earnings will be at the higher end of the previous guidance range of $1.43 to $1.50. In addition, Peet’s expects its 2011 reported earnings to be at the higher end of the $1.27 to $1.34 range, including litigation-related expenses of 16 cents per share.

Further, Peet’s anticipates its 2012 earnings to be in the range of $1.70 to $1.80.

Revenues and Operating Profits

Net revenue climbed 14% to $91.2 million from $80.2 million for the corresponding period of fiscal 2010. Strong sales growth was fuelled by grocery business that was at its strongest at 38% for this quarter. Revenues also surpassed the Zacks Consensus Estimate of $90.0 million.

Management stated that the quarter saw strong fundamentals and robust business growth. Sales growth was strong across all channels. The company thus affirms its total net revenue growth guidance to be in the range of 10% to 12% for fiscal 2011. It also expects net revenue to grow around 10% for 2012.

Cost of sales increased to 51.6% based on total net revenue in the reported quarter as compared with 47.5% last year, on the back of higher coffee costs and higher milk costs and a mix shift towards the specialty business. However, price increases and lower shipping expenses partially offset the impact of these higher costs.

Operating expenses, based on net revenue, came down to 31.3% from 33.1% last year, owing to a favorable mix shift to the specialty business, price increases across all channels, leveraging overhead costs, and effective cost management in retail stores.

Segment Details

Retail net sales moved up 5% to $52.3 million in the third quarter 2011, from $49.8 million a year ago. The growth was attributable to 7% sales growth in beverages and pastries. Peet’s ended the quarter with 194 stores versus 193 stores at the end of the third quarter 2010. It opened one store in the quarter. However, operating income for Retail plummeted 65.5% year over year to $1.6 million.

Specialty segment’s net revenue climbed 28% to $38.9 million for the quarter, compared with $30.4 million for the corresponding period of fiscal 2010. Grocery business grew 38% over last year; the foodservice and office business grew 18%; and home delivery net revenue grew 3%. Specialty segment reported operating income of $7.7 million, 1.7% lower than the year ago period.

Other Financial Details

At the end of the third quarter 2011, cash and cash equivalents plus investments were $12 million as compared with $49 million at year end 2010.

Total assets were $198.6 million at quarter-end, with shareholders’ equity of $163.1 million.

Management sees momentum and plenty of new growth opportunities for the company. It expects to deliver strong sales and earnings growth, while continuing to invest in and explore additional growth initiatives.

Peet’s is a growing company. The company’s high quality standard and 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 pest damage concerns us.

Currently, Peet’s holds a Zacks # 3 Rank, which translates into a short-term Hold rating. On a long-term basis, we prefer to rate the stock as Neutral.

 
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