Peet’s Coffee & Tea Inc. (PEET) reported first quarter 2011 diluted earnings per share of 41 cents, up 58% versus 2010 proforma diluted earnings per share of 26 cents. It also surpassed the Zacks Consensus Estimate of 34 cents by 20.58%.
The company lowered full-year 2011 diluted earnings per share guidance by $0.10 to the range of $1.43 to $1.50 range on the back of significant rise in cost of coffee during the last three months.
Revenues and Operating Profits
Net revenue climbed 9% to $88.5 million from $81.2 million for the corresponding period of fiscal 2010. Strong sales growth was fuelled by grocery business that was at its strongest at 22% 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 9.8% and EPS growth of 58%.
The company expects full-year total net revenue growth to be in the range of 8% to 10%.
Cost of sales was 46.6% of total net revenue, compared to 46.2% last year. The increase reflected higher coffee costs and a mix shift towards the specialty business, which has a higher cost of sales, offset by the impact of price increases across all channels.
Operating expenses as a percentage of net revenue came down to 31.5% from 34.3% 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. Operating income increased 9.8%, in the quarter, to $8,640 million.
Segment Details
Retail net sales inched up 4% to $52.1 million for the first quarter 2011, from $50.1 million a year ago. The growth was attributable to sales growth in existing stores. The company ended the quarter with 193 stores, the same number as that at the end of the first quarter in 2010. Operating income for Retail climbed 12.7% year over year to $6,629 million.
Specialty segment’s net revenue climbed 17% to $36.4 million for the quarter, compared to $31.1 million for the corresponding period of fiscal 2010. Grocery business grew 22% over last year; the foodservice and office business grew 11%; and home delivery net revenue grew 4%. Specialty segment reported operating income of $9,558 million, 26.3% 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
We are encouraged by the premium coffee industry’s strong growth over the past decade and the fact that the company is targeting the growing consumer demand for the coffee comes as a further fillip. The company’s two competitive advantages are its quality and the variety and Peet’s vertically integrated business model that allows it to control the quality of coffee at all stages.
However, the company faces fierce competition especially in the specialty coffee category. Major peers for the company include Coca-Cola Enterprises Inc. (CCE) and Starbucks Corporation (SBUX).
We currently have a Zacks #4 Rank for PEET, which translates into a Sell rating on short-term basis. On a longer term, we have a Neutral recommendation.
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