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Minneapolis, Minnesota-based Caribou Coffee Company, Inc. posted earnings of 8 cents per share in the third quarter of 2012, which surpassed the Zacks Consensus Estimate of 6 cents and year-ago quarter adjusted earnings of 7 cents.

Revenue during the quarter slipped 5.2% to $77.2 million as commercial sales dropped significantly. However, reported sales beat the Zacks Consensus Estimate of $75.0 million.

Quarter Highlights

Segment wise, Coffeehouse sales crept up 4.0% year over year to $61.0 million during the quarter, driven by a 3.5% rise in comparable coffeehouse sales. The increase in comparable coffeehouse sales was driven by higher traffic and favorable beverages sales. Commercial sales plunged 39.9% to $11.9 million, on the back of drop in sales from the Keurig single-serve platform and royalties, partially offset by higher sales from existing and new customers in the foodservice and grocery channels. Franchise revenues shot up 45.0% to $4.3 million, attributable to unit growth, higher product sales and royalties.

Cost of sales and related occupancy costs dropped 11.3% to $37.2 million in the third quarter of 2012, as the Keurig single-serve platform generated lower sales. Operating expenses inched up 1.0% to $26.3 million as legislative changes resulted in increased expenses for debit card transactions. General and administrative expense rose 5.1% to $8.2 million, while depreciation and amortization expenses were down $0.1 million to $2.5 million.

Total operating income was flat year over year at $2.8 million, while operating margin expanded 20 basis points (bps) to 3.6%, due to lower depreciation and amortization expenses.

Liquidity Position

Caribou Coffee ended the quarter with cash and cash equivalents of $28.6 million and shareholders’ equity of $100 million.

Store Update

During the quarter, the company opened 14 franchised coffeehouses and 6 company-owned coffeehouses. The company also closed 6 company-owned coffeehouses. As of September 30, 2012, Caribou Coffee had 610 coffeehouses, of which 408 were company-owned and 202 franchised.

The company remains focused on unit growth of 10% to 12% in 2012 and 2013.

Outlook

The company narrowed its earnings outlook for 2012 from 43–46 cents to 44–46 cents per share. However, Caribou Coffee anticipates that net sales growth will continue to remain flat year over year.

For 2013, Caribou Coffee, the second largest premium coffeehouse operator in the United States, anticipates net sales growth of 6% to 8% and earnings per share in the range of 52 cents to 55 cents per share.

Our Take

During the quarter, sales slipped and the preliminary 2013 earnings guidance was also below the Zacks Consensus Estimate of 57 cents. Moreover, food cost pressure coupled with the lingering impact of Hurricane Sandy will continue to be 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.

One of Caribou Coffee’s competitors, Domino's Pizza Inc. (DPZ - Analyst Report) reported third quarter 2012 adjusted earnings of 43 cents per share, ahead of the Zacks Consensus Estimate of 41 cents. The results compared favorably with the year-ago adjusted earnings of 35 cents as well.

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

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