Caribou Coffee Signs Deal with Jewel-Osco

Caribou Coffee Company Inc. (CBOU) recently entered into a partnership with grocery giant Jewel-Osco to expand its presence in one of its key markets, Chicago. The deal is in line with the company’s strategy to expand through grocery stores and retail outlets.

Based in Itasca, Illinois, Jewel-Osco is a supermarket chain with more than 150 stores and is owned by Eden Prairie, Minnesota -based SUPERVALU Inc. (SVU - Analyst Report).

The Minneapolis-based Caribou recently opened its first coffeehouse outlet in a Jewel-Osco store in Barrington and plans to unveil two additional shops in Jewel's Hoffman Estates and Countryside locations in the near future. Caribou is also expecting to open five more shops through next year with the grocery chain.

Apart from strengthening its presence in the existing markets, the agreement will also enhance Caribou's growth among diverse business units. Moreover, along with offering its signature coffee and espresso, Caribou also plans to introduce its premium packaged coffee throughout the grocery chain.

One of the company’s nearest competitors, Starbucks Corporation (SBUX - Analyst Report), also focuses on a multi-channel growth strategy for expansion.

Caribou coffeehouse currently owns and operates 585 coffeehouses, including 174 franchised locations, in 21 states, the District of Columbia and nine international markets. The company continues to drive growth through unit expansion and plans to open 60 to 70 locations in 2012 in both domestic and international markets, implying a year-over-year upside of 10% to 12%.

The company’s international pipeline remains very strong, and in the second quarter, the company opened its 100th international location. Thus, Caribou remains in a growth trajectory in the international markets.

We believe that Caribou Coffee is well positioned to sustain its growth momentum, while generating improved earnings on the heels of innovative offerings. However, a lowered outlook for 2012 and food cost pressure make us cautious. Hence, we maintain a Zacks #3 Rank on Caribou Coffee, which translates into a short-term Hold rating. Our long-term recommendation remains Neutral.