Caribou Coffee In Line, Guides Down

Caribou Coffee Company, Inc. ( ) , the second largest premium coffeehouse operator in the United States, posted earnings of 6 cents per share in the first quarter of 2012, in line with the Zacks Consensus Estimate, but missing the year-ago quarter adjusted earnings of 8 cents. The earnings fell on year-over-year basis due to food cost inflation in the first half of 2012.

The company’s sales during the quarter increased 11.4% to $80.5 million, aided by improved performance across all its business lines.

Quarter Highlights

Segment wise, Coffeehouse sales crept up 3.7% year over year to $57.6 million during the quarter, driven by a 2.5% rise in comparable coffeehouse sales. The upside in comparable coffeehouse sales was driven by higher traffic and favorable beverage sales mix. Commercial sales surged 49.9% to $11.7 million, on the back of higher sales from the Keurig single-serve platform as well as existing and new customers in the foodservice and grocery channels. Franchise revenues rose 10.6% to $3.0 million, attributable to higher product sales and royalties.

Cost of sales and related occupancy cost increased 26.5% to $42.1 million in the first quarter of 2012, driven by higher sales and commodity costs in the quarter. Operating expense climbed 4.7% to $25.4 million, attributable to increased labor costs. General and administrative expense fell 6.8% to $7.3 million and depreciation and amortization expenses were down 13.8% to $2.5 million.

Total operating income plunged 26.9% to $2.1 million, while operating margin contracted 140 basis points (bps) to 2.6%, due to higher cost of sales and related occupancy cost as well as escalation in operating expenses.

Financial Position

Caribou Coffee ended the year with cash and cash equivalents of $42.5 million and shareholders’ equity of $103.1 million.

Outlook

The Minneapolis, Minnesota-based company trimmed its financial outlook for 2012 based on the slowdown in the single cup business. The company expects earnings per share in the range of 47 cents to 50 cents compared with the earlier expectations of 48 cents to 51 cents. Moreover, the company anticipates net sales growth in the range of 6% to 8%, lower than its previously expectation of 10%.

Our Take

We expect estimates to decrease for fiscal 2012 as the company lowered its outlook for 2012 and food cost pressure will remain a headwind. However, to drive sales, Caribou Coffee remains focused on introducing innovative food and beverage products in the retail coffeehouses. The company also continues to drive growth by unit expansion and plans to open 55 to 70 locations in 2012, implying an upside of 10% to 12%. The Zacks Consensus Estimates for fiscal 2012 and 2013 are 50 cents and 65 cents per share, respectively, reflecting year-over-year growth of 20.2% and 28.1%.

One of Caribou Coffee’s competitors,Chipotle Mexican Grill Inc. ( CMG - Analyst Report ) has reported first-quarter 2012 earnings of $1.97 per share, surpassing the Zacks Consensus Estimate of $1.93 as well as the year-earlier earnings of $1.46. The better-than-expected results were driven by double-digit top-line growth and margin expansion.

Caribou currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are maintaining our long-term Neutral recommendation on the stock.