Attached files
file | filename |
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EX-31.2 - PEETS COFFEE & TEA INC | v202045_ex31-2.htm |
EX-31.1 - PEETS COFFEE & TEA INC | v202045_ex31-1.htm |
EX-32.2 - PEETS COFFEE & TEA INC | v202045_ex32-2.htm |
EX-32.1 - PEETS COFFEE & TEA INC | v202045_ex32-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended October 3, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from ______________to __________________
Commission
file number: 0-32233
PEET’S
COFFEE & TEA, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Washington
|
91-0863396
|
|
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S.
Employer
Identification
No.)
|
1400
Park Avenue
Emeryville,
California 94608-3520
(Address
of Principal Executive Offices)(Zip Code)
(510)
594-2100
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes x No o.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large
Accelerated Filer o
|
Accelerated
Filer x
|
Non-Accelerated
Filer o
|
Smaller
reporting company o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Exchange
Act Rule 12b-2). Yes o No x
As of
November 7, 2010, 12,804,611 shares of registrant’s Common Stock were
outstanding.
INDEX
|
Page
|
||
PART
I
|
FINANCIAL
INFORMATION
|
||
Item
1.
|
Unaudited
Condensed Consolidated Financial Statements
|
3
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
|
Item
3.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
20
|
|
Item
4.
|
Controls
and Procedures
|
20
|
|
PART
II
|
OTHER
INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
21
|
|
Item
1A.
|
Risk
Factors
|
22
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and use of Proceeds
|
22
|
|
Item
5.
|
Other
Information
|
22
|
|
Item
6.
|
Exhibits
|
22
|
|
Signatures
|
24
|
2
ITEM
1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PEET’S
COFFEE & TEA, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited,
in thousands, except share amounts)
October
3,
|
January
3,
|
|||||||
2010
|
2010
|
|||||||
ASSETS
|
||||||||
Current
assets
|
||||||||
Cash
and cash equivalents
|
$ | 28,551 | $ | 47,934 | ||||
Accounts
receivable, net
|
13,668 | 15,209 | ||||||
Inventories
|
40,360 | 25,936 | ||||||
Deferred
income taxes - current
|
3,550 | 3,592 | ||||||
Prepaid
expenses and other
|
8,195 | 5,863 | ||||||
Total
current assets
|
94,324 | 98,534 | ||||||
Property,
plant and equipment, net
|
98,819 | 103,494 | ||||||
Other
assets, net
|
2,164 | 2,775 | ||||||
Total
assets
|
$ | 195,307 | $ | 204,803 | ||||
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
Current
liabilities
|
||||||||
Accounts
payable and other accrued liabilities
|
$ | 12,184 | $ | 13,669 | ||||
Accrued
compensation and benefits
|
7,964 | 10,832 | ||||||
Deferred
revenue
|
5,434 | 6,845 | ||||||
Total
current liabilities
|
25,582 | 31,346 | ||||||
Deferred
income taxes - non current
|
279 | 321 | ||||||
Deferred
lease credits
|
7,097 | 7,059 | ||||||
Other
long-term liabilities
|
1,372 | 1,021 | ||||||
Total
liabilities
|
34,330 | 39,747 | ||||||
Shareholders'
equity
|
||||||||
Common
stock, no par value; authorized 50,000,000 shares;
|
||||||||
issued
and outstanding:12,773,000 and 13,104,000 shares
|
76,906 | 92,054 | ||||||
Retained
earnings
|
84,071 | 73,002 | ||||||
Total
shareholders' equity
|
160,977 | 165,056 | ||||||
Total
liabilities and shareholders' equity
|
$ | 195,307 | $ | 204,803 |
See notes
to condensed consolidated financial statements.
3
PEET’S
COFFEE & TEA, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited,
in thousands, except per share amounts)
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
3,
|
September
27,
|
October
3,
|
September
27,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Retail
stores
|
$ | 49,791 | $ | 47,863 | $ | 150,422 | $ | 144,686 | ||||||||
Specialty
sales
|
30,417 | 26,042 | 91,758 | 74,889 | ||||||||||||
Net
revenue
|
80,208 | 73,905 | 242,180 | 219,575 | ||||||||||||
Cost
of sales and related occupancy expenses
|
38,138 | 34,291 | 113,054 | 99,812 | ||||||||||||
Operating
expenses
|
26,526 | 26,003 | 81,301 | 76,676 | ||||||||||||
Transaction
related expenses
|
- | 49 | 970 | 128 | ||||||||||||
General
and administrative expenses
|
5,745 | 5,770 | 17,669 | 17,782 | ||||||||||||
Depreciation
and amortization expenses
|
3,947 | 3,962 | 11,844 | 11,200 | ||||||||||||
Total
costs and expenses from operations
|
74,356 | 70,075 | 224,838 | 205,598 | ||||||||||||
Income
from operations
|
5,852 | 3,830 | 17,342 | 13,977 | ||||||||||||
Interest
income, net
|
2 | (15 | ) | 6 | 111 | |||||||||||
Income
before income taxes
|
5,854 | 3,815 | 17,348 | 14,088 | ||||||||||||
Income
tax provision
|
2,091 | 1,346 | 6,279 | 5,158 | ||||||||||||
Net
income
|
$ | 3,763 | $ | 2,469 | $ | 11,069 | $ | 8,930 | ||||||||
Net
income per share:
|
||||||||||||||||
Basic
|
$ | 0.29 | $ | 0.19 | $ | 0.85 | $ | 0.69 | ||||||||
Diluted
|
$ | 0.28 | $ | 0.19 | $ | 0.81 | $ | 0.67 | ||||||||
Shares
used in calculation of net income per share:
|
||||||||||||||||
Basic
|
12,847 | 12,976 | 13,094 | 12,977 | ||||||||||||
Diluted
|
13,425 | 13,343 | 13,706 | 13,267 |
4
PEET’S
COFFEE & TEA, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited,
in thousands)
Thirty-nine
weeks ended
|
||||||||
October
3,
|
September
27,
|
|||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
income
|
$ | 11,069 | $ | 8,930 | ||||
Adjustments
to reconcile net income to net cash provided by
|
||||||||
operating
activities:
|
||||||||
Depreciation
and amortization
|
13,456 | 12,790 | ||||||
Amortization
of interest purchased
|
- | 36 | ||||||
Stock-based
compensation
|
2,457 | 2,277 | ||||||
Excess
tax benefit from exercise of stock options
|
(1,579 | ) | (275 | ) | ||||
Tax
benefit from exercise of stock options
|
1,311 | 119 | ||||||
Loss
on disposition of assets and asset impairment
|
110 | 184 | ||||||
Deferred
income taxes
|
- | (72 | ) | |||||
Changes
in other assets and liabilities:
|
||||||||
Accounts
receivable, net
|
1,541 | 1,242 | ||||||
Inventories
|
(14,424 | ) | (4,440 | ) | ||||
Prepaid
expenses and other current assets
|
(2,332 | ) | (836 | ) | ||||
Other
assets
|
26 | 185 | ||||||
Accounts
payable, accrued liabilities and deferred revenue
|
(6,249 | ) | (1,904 | ) | ||||
Deferred
lease credits and other long-term liabilities
|
389 | 829 | ||||||
Net
cash provided by operating activities
|
5,775 | 19,065 | ||||||
Cash
flows from investing activities:
|
||||||||
Purchases
of property, plant and equipment
|
(8,396 | ) | (11,908 | ) | ||||
Proceeds
from sales of property, plant and equipment
|
17 | - | ||||||
Changes
in restricted investments
|
558 | 878 | ||||||
Proceeds
from sales and maturities of marketable securities
|
- | 8,507 | ||||||
Purchases
of marketable securities
|
- | (371 | ) | |||||
Net
cash used in investing activities
|
(7,821 | ) | (2,894 | ) | ||||
Cash
flows from financing activities:
|
||||||||
Net
proceeds from issuance of common stock
|
9,315 | 2,365 | ||||||
Purchase
of common stock
|
(28,231 | ) | (6,564 | ) | ||||
Excess
tax benefit from exercise of stock options
|
1,579 | 275 | ||||||
Net
cash used in financing activities
|
(17,337 | ) | (3,924 | ) | ||||
(Decrease)
increase in cash and cash equivalents
|
(19,383 | ) | 12,247 | |||||
Cash
and cash equivalents, beginning of period
|
47,934 | 4,719 | ||||||
Cash
and cash equivalents, end of period
|
$ | 28,551 | $ | 16,966 | ||||
Non-cash
investing activities:
|
||||||||
Capital
expenditures incurred, but not yet paid
|
$ | 641 | $ | 716 | ||||
Other
cash flow information:
|
||||||||
Cash
paid for income taxes
|
5,402 | 5,023 |
5
Peet’s
Coffee & Tea, Inc.
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Basis of
Presentation
|
The
accompanying condensed consolidated financial statements of Peet’s Coffee &
Tea, Inc. and its subsidiaries (collectively, the “Company” or “Peet’s”) as of
October 3, 2010 and for the thirteen and thirty-nine weeks ended October 3, 2010
and September 27, 2009 are unaudited and, in the opinion of management, contain
all adjustments, consisting only of normal recurring items necessary to present
fairly the financial position and results of operations for such periods. The information
included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read
in conjunction with the Company’s annual consolidated financial statements in
Peet’s Annual Report on Form 10-K for the year ended January 3, 2010 (the “2009
Form 10-K”).
The
results of operations for the thirteen and thirty-nine weeks ended October 3,
2010 are not necessarily indicative of the results expected for the full
year.
Recent
Accounting Pronouncements
On
January 21, 2010, the Financial Accounting Standards Board (“FASB”) issued
an Accounting Standards Update (“ASU”) relating to Fair Value Measurements and
Disclosures, to add new requirements for disclosures about transfers into and
out of fair value measurement Levels 1 and 2 and separate disclosures about
purchases, sales, issuances, and settlements relating to Level 3 fair value
measurements. The ASU also clarifies existing fair value disclosures about
the level of disaggregation and about inputs and valuation techniques used to
measure fair value. The Company is subject to the requirements of this ASU
commencing the first day of its 2010 fiscal year. This ASU did not have an
impact to the Company’s condensed consolidated financial statements except to
the extent it required the Company to provide increased disclosure.
In
February 2010, the FASB issued an ASU that amends Subtopic 855, “Subsequent
Events”, of the Accounting Standards Codification (“ASC”). An entity that
is an SEC filer is not required to disclose the date through which subsequent
events have been evaluated. This change alleviates potential conflicts
between Subtopic 855-10 and the SEC’s disclosure requirements.
Comprehensive
Income
For the
thirteen weeks ended October 3, 2010 and September 27, 2009, comprehensive
income was $3,763,000 and $2,052,000, respectively. For the thirty-nine weeks
ended October 3, 2010 and September 27, 2009, comprehensive income was
$11,069,000 and $12,735,000, respectively. Comprehensive income consists of net
income and net unrealized gains and losses on investments.
Net
Income per Share
Basic net
income per share is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted net income per share
reflects the potential dilution that could occur from common shares issued
through stock options. Anti-dilutive shares of 226,027 and 1,234,399 have been
excluded from diluted weighted average shares outstanding for the thirteen week
periods ended October 3, 2010 and September 27, 2009, respectively, and 140,056
and 1,389,932 for the thirty-nine week periods, respectively.
The
number of incremental shares from the assumed exercise of stock options was
calculated by applying the treasury stock method. The following table summarizes
the differences between basic weighted average shares outstanding and diluted
weighted average shares outstanding used to compute diluted net income per share
(in thousands):
6
Thirteen
weeks
|
Thirty-nine
weeks
|
|||||||||||||||
October
3,
|
September
27,
|
October
3,
|
September
27,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
weighted average shares
|
||||||||||||||||
outstanding
|
12,847 | 12,976 | 13,094 | 12,977 | ||||||||||||
Incremental
shares from assumed
|
||||||||||||||||
exercise
of stock options and awards
|
578 | 367 | 612 | 290 | ||||||||||||
Diluted
weighted average shares
|
||||||||||||||||
outstanding
|
13,425 | 13,343 | 13,706 | 13,267 |
2.
|
Fair Value
Measurements
|
The
Company adopted a single authoritative definition of fair value, a framework for
measuring fair value and expanded disclosure of fair value measurements for
financial assets and liabilities as of the beginning of the 2008 fiscal
year. The impact of adoption was not significant. ASC 820, “Fair Value
Measurements and Disclosures,” defines fair value as the exchange price that
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. ASC 820
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs and minimize the use of unobservable inputs when
measuring fair value. The standard describes three levels of inputs that may be
used to measure fair value:
Level 1 - Quoted prices in
active markets for identical assets or liabilities.
Level 2 - Inputs other than
quoted prices included within Level 1 that are either directly or indirectly
observable.
Level 3 - Unobservable inputs
that are supported by little or no market activity, therefore requiring an
entity to develop its own assumptions about the assumptions that market
participants would use in pricing.
Financial Assets and
Liabilities
The
Company uses the market approach, as defined as Level 1 in the fair value
hierarchy, to measure fair value for its financial assets and liabilities.
The market approach uses prices and other relevant information generated by
market transactions involving identical assets or liabilities.
Unrealized
gains or losses on marketable securities are recorded in accumulated other
comprehensive income at each measurement date.
The
carrying value of cash and equivalents, restricted cash, receivables and
accounts payable approximates fair value.
Assets and Liabilities
Measured at Fair Value on a Non-Recurring Basis
The
Company measures certain non-financial assets and liabilities, including
long-lived assets, at fair value on a non-recurring basis, as deemed necessary.
As of October 3, 2010, the Company was not required to measure any non-financial
assets and liabilities at fair value.
7
3.
|
Inventories
|
The
Company’s inventories consist of the following (in thousands):
October
3,
|
January
3,
|
|||||||
2010
|
2010
|
|||||||
Green
coffee
|
$ | 28,937 | $ | 16,228 | ||||
Other
inventory
|
11,423 | 9,708 | ||||||
Total
|
$ | 40,360 | $ | 25,936 |
4.
|
Stock Purchase
Program
|
On
October 27, 2008, the Board of Directors approved a stock purchase program
providing for the purchase of up to one million shares of the Company’s common
stock, with no deadline for completion and the Company announced its plan on
October 28, 2008 on Form 8-K. During the thirty-nine weeks ended October
3, 2010, the Company purchased and retired 730,669 shares of common stock, at an
average price of $38.64, in accordance with this stock purchase
program. 5,219 shares remain available for purchase under this stock
purchase program.
On
September 2, 2010, the Board of Directors authorized the Company to purchase up
to one million additional shares of the Company’s common stock. No
purchases were made during the thirty-nine weeks ended October 3, 2010 and
therefore one million shares remain available under this stock purchase
program.
Purchases
under the Company’s stock purchase programs may be made from time to time on the
open market at prevailing market prices or in negotiated transactions off the
market.
5.
|
Stock-Based
Compensation
|
On May
18, 2010, the Company’s shareholders approved the Peet’s Coffee & Tea, Inc.
2010 Equity Incentive Plan. The 2010 Plan is intended as the successor to
and continuation of the Peet’s Coffee & Tea, Inc. 2000 Equity Incentive Plan
(“Prior Plan”). Under the 2010 Plan, the Company may grant incentive stock
options, nonstatutory stock options, stock appreciation rights, restricted stock
awards, restricted stock unit awards (“RSUs”), performance stock awards,
performance cash awards, and other stock awards. The aggregate number of
shares of common stock that may be issued pursuant to stock awards from and
after May 18, 2010 shall not exceed 700,000 shares plus shares underlying
options under the Prior Plan that expire or terminate, less one share for each
share of stock issued pursuant to an option or stock appreciation right under
the Prior Plan after January 3, 2010 and 1.8 shares for each share of stock
issued pursuant to a restricted stock award, restricted stock unit award
(“RSUs”), performance stock award, performance cash award, or other stock
award. No additional stock awards will be granted under the Prior
Plan.
8
Stock
Option Activity
Changes
in stock options were as follows:
Weighted
Average
|
Aggregate
|
|||||||||||||||
Weighted
Average
|
Remaining
|
Intrinsic
|
||||||||||||||
Options
|
Exercise
Price
|
Contractual
|
Value
|
|||||||||||||
Outstanding
|
Per
Share
|
Life
(Years)
|
(in
thousands)
|
|||||||||||||
Outstanding
at January 3, 2010
|
2,764,225 | $ | 22.35 | 5.50 | $ | 30,400 | ||||||||||
Granted
|
249,530 | 36.36 | ||||||||||||||
Canceled
|
(124,440 | ) | 26.67 | |||||||||||||
Exercised
|
(393,221 | ) | 23.21 | |||||||||||||
Outstanding
at October 3, 2010
|
2,496,094 | $ | 23.40 | 5.24 | $ | 26,923 | ||||||||||
Vested
or expected to vest, October 3, 2010
|
2,402,634 | $ | 23.13 | 5.12 | $ | 26,502 | ||||||||||
Exercisable
at October 3, 2010
|
1,722,972 | $ | 20.67 | 3.90 | $ | 22,861 |
Restricted
Stock Unit Awards
During
the second quarter of 2010, the Company began granting RSUs under the 2010
Equity Incentive Plan. RSUs vest according to a pre-determined vest
schedule set at the grant date.
Changes
in RSU’s were as follows:
Number
of
|
Weighted
Average
|
|||||||
Units
|
Grant
Date
|
|||||||
Outstanding
|
Fair
Value
|
|||||||
Outstanding
at January 3, 2010
|
- | $ | - | |||||
Granted
|
27,035 | 37.14 | ||||||
Vested
|
- | - | ||||||
Forfeited,
cancelled or expired
|
(1,404 | ) | 37.10 | |||||
Outstanding
at October 3, 2010
|
25,631 | $ | 37.14 |
Employee
Stock Purchase Plan
The
Company has an Employee Stock Purchase Plan (“ESPP”) under which eligible
employees can choose to have up to 15% of their annual earnings withheld to
purchase the Company’s common stock. The price of stock purchased under the ESPP
is 85% of the lower of the market prices at the beginning of the offering period
and the end of the offering period market price. The Company initially reserved
200,000 shares of common stock for issuance under the ESPP, which is subject to
increase as of each annual meeting of the Company’s shareholders, until 2020, by
the lesser of 200,000 shares or 1.5% of the number of shares of common stock
outstanding on the date of such annual meeting. However, the Board of Directors
has the authority to increase the ESPP reserve by a smaller number of shares of
common stock on each such date. During the thirteen week period ended October 3,
2010, 6,778 shares of the Company’s common stock were purchased under the ESPP.
At October 3, 2010, 1,457,587 shares remain available for future issuance under
the ESPP.
Stock-Based
Compensation
Stock-based
compensation expense consists of and was recognized in the condensed
consolidated statements of income as follows (in thousands):
9
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
3,
|
September
27,
|
October
3,
|
September
27,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Stock-based
compensation expense
|
$ | 783 | $ | 731 | $ | 2,405 | $ | 2,125 | ||||||||
Employee
Stock Purchase Plan expense
|
50 | 37 | 52 | 152 | ||||||||||||
Total
|
$ | 833 | $ | 768 | $ | 2,457 | $ | 2,277 | ||||||||
Cost
of sales and related occupancy expenses
|
$ | 104 | $ | 53 | $ | 411 | $ | 244 | ||||||||
Operating
expenses
|
264 | 306 | 708 | 931 | ||||||||||||
General
and administrative expenses
|
465 | 409 | 1,338 | 1,102 | ||||||||||||
Total
|
$ | 833 | $ | 768 | $ | 2,457 | $ | 2,277 | ||||||||
Tax
benefit
|
$ | 339 | $ | 305 | $ | 1,000 | $ | 924 |
The fair
value of each RSU is equal to the stock price on the date of grant. The fair
value of each option grant and Employee Stock Purchase Plan award is estimated
on the date of grant using the Black-Scholes-Merton option-pricing model with
the following assumptions:
October
3,
|
September
27,
|
|||||||
2010
|
2009
|
|||||||
Expected
term in years
|
5.8 | 5.7 | ||||||
Expected
stock price volatility
|
36.6 | % | 37.6 | % | ||||
Risk-free
interest rate
|
2.3 | % | 2.9 | % | ||||
Expected
dividend yield
|
0.0 | % | 0.0 | % | ||||
Estimated
fair value per option granted
|
$ | 13.92 | $ | 10.57 | ||||
Estimated
fair value per RSU awarded
|
$ | 37.14 | $ | - |
6.
|
Line of
Credit
|
On
November 26, 2008, the Company entered into a credit agreement with Wells Fargo
Bank, National Association (“Wells Fargo”). The credit agreement provides
for a $25.0 million revolving line of credit, the proceeds of which may be used
in the general course of business, including to fund working capital, capital
expenditures, share repurchases and other needs of the Company. The line of
credit had an original maturity date of December 1, 2009, with an option by the
Company to extend the maturity date to December 1, 2010, which was exercised
pursuant to the terms of the credit agreement.
During
the thirteen weeks ended October 3, 2010 and as of October 3, 2010, there were
no borrowings under this agreement. Total unused borrowing capacity under the
credit agreement was $25.0 million as of October 3, 2010.
7.
|
Legal
Proceedings
|
The
Company is party to the significant legal proceedings described below. Based on
the Company’s experience, it believes that any damage amounts claimed in the
specific matters discussed below are not meaningful indicators of the Company’s
potential liability. The Company believes that it has valid defenses to these
legal proceedings and is defending the matters vigorously. Nevertheless, the
outcome of any litigation is inherently uncertain. The Company is currently
unable to estimate the remaining possible losses, if any, in the unresolved
legal proceedings described below. Should any one of these proceedings against
us, or a combination of more than one, be successful, or should the Company
determine to settle any or a combination of these matters on unfavorable terms,
it may be required to pay substantial sums, which could have a material impact
on the Company’s consolidated financial position or results of
operations.
On
July 14, 2008, a complaint was filed against the Company in California
Superior Court, Alameda County, by three former employees on behalf of
themselves and all other California store managers. The complaint alleges that
store managers based in California were not paid overtime wages, were not
provided meal or rest periods, were not provided accurate wage statements and
were not reimbursed for business expenses. The plaintiffs seek injunctive
relief, monetary damages, penalties, costs and attorneys’ fees, and prejudgment
interest. On December 16, 2009, the Company reached a tentative settlement
pursuant to which it would deny any liability but agree to maximum payment of
$2.6 million. The notice period to the Class concluded on August 4, 2010, and
the California Superior Court approved the final settlement on September 1,
2010. Based on the final settlement amount, the Company recorded into
income a credit of $93,000 during the thirteen weeks ended October 3, 2010 based
on the difference between the original $2.6 million recorded liability and the
anticipated settlement payment.
10
On April
1, 2010, the Company was served with the First Amended Complaint filed in
California Superior Court by Amber Morgan and Norna Lai, on behalf of themselves
and all other non-exempt employees similarly situated in the state of California
naming the Company as a defendant. The First Amended Complaint alleges
claims for unpaid overtime, unpaid meal and rest period premiums, unpaid
business expenses, unpaid minimum wages, untimely wages paid at time of
termination, untimely payment of wages, failure to pay vacation wages, violation
of California Business & Professions Code section 17200 and non-compliant wage
statements. The plaintiffs seek injunctive relief, restitution, monetary
damages, penalties under the California Labor Code Private Attorneys General
Act, costs and attorneys’ fees, penalties, and prejudgment interest. On
April 30, 2010, the Company filed an answer denying the allegations set forth in
the complaint and asserting a number of affirmative defenses thereto. On August
27, 2010, the plaintiffs filed a Second Amended Complaint to which the Company
filed its answer on September 27, 2010. At this time, it is not feasible
to predict the outcome of or a range of loss, should a loss occur, from this
proceeding.
On
February 8, 2010, the Company received a letter from a law firm alleging
that the Company and several other well known sellers of coffee violate the
California Safe Drinking Water and Toxic Enforcement Act of 1986, commonly known
as Proposition 65, by failing to warn consumers that “ready-to-drink” coffee
contains a substance that is allegedly known to cause cancer. Under Proposition
65, the letter commenced a 60-day period during which the California Attorney
General was required to decide whether to take over the matter. That 60-day
period has now expired, the Attorney General has declined to act, and the law
firm that served the letter on the Company, as expected, filed a complaint on
April 13, 2010, naming the Company among others. The complaint seeks
statutory penalties and costs of enforcement, as well as a court order that the
Company is required to provide warnings and other notices to customers. As
this matter is at a very early stage, we are not able to predict the probability
of the outcome or estimate of loss, if any, related to this matter.
The
Company is involved in various other litigation and governmental proceedings,
not described above, that arise in the normal course of business. While it is
not possible to determine with certainty the ultimate outcome or the duration of
any such litigation or governmental proceedings, the Company believes, based on
current knowledge and the advice of counsel, that such litigation and
proceedings will not have a material impact on the Company’s consolidated
financial position or results of operations.
11
8.
|
Segment
Information
|
The
Company operates in two reportable segments: retail and specialty
sales. Retail store operations consist of sales of whole bean coffee,
beverages, tea and related products through Company-operated retail
stores. Specialty sales consist of whole bean coffee sales through three
operating segments: grocery, home delivery, foodservice and office.
Management
evaluates segment performance primarily based on revenue and segment operating
income. The following table presents certain financial information for
each segment. Segment income before taxes excludes unallocated marketing
expenses and general and administrative expenses. Unallocated assets
include cash, coffee inventory in the warehouse, corporate headquarter assets
and intangible and other assets (dollars in thousands).
Retail
|
Specialty
|
Unallocated
|
Total
|
|||||||||||||||||||||||||
Percent
|
Percent
|
Percent
|
||||||||||||||||||||||||||
of
Net
|
of
Net
|
of
Net
|
||||||||||||||||||||||||||
Amount
|
Revenue
|
Amount
|
Revenue
|
Amount
|
Revenue
|
|||||||||||||||||||||||
For
the thirteen weeks ended October 3, 2010
|
||||||||||||||||||||||||||||
Net
revenue
|
$ | 49,791 | 100.0 | % | $ | 30,417 | 100.0 | % | $ | 80,208 | 100.0 | % | ||||||||||||||||
Cost
of sales and occupancy
|
22,082 | 44.3 | % | 16,056 | 52.8 | % | 38,138 | 47.5 | % | |||||||||||||||||||
Operating
expenses
|
20,457 | 41.1 | % | 6,069 | 20.0 | % | 26,526 | 33.1 | % | |||||||||||||||||||
Depreciation
and amortization
|
2,825 | 5.7 | % | 426 | 1.4 | % | $ | 696 | 3,947 | 4.9 | % | |||||||||||||||||
Segment
operating income
|
4,427 | 8.9 | % | 7,866 | 25.9 | % | (6,441 | ) | 5,852 | 7.3 | % | |||||||||||||||||
Total
assets
|
58,866 | 18,522 | 117,919 | 195,307 | ||||||||||||||||||||||||
Capital
expenditures
|
1,358 | 197 | 1,386 | 2,941 | ||||||||||||||||||||||||
For
the thirteen weeks ended September 27, 2009
|
||||||||||||||||||||||||||||
Net
revenue
|
$ | 47,863 | 100.0 | % | $ | 26,042 | 100.0 | % | $ | 73,905 | 100.0 | % | ||||||||||||||||
Cost
of sales and occupancy
|
21,179 | 44.2 | % | 13,112 | 50.3 | % | 34,291 | 46.4 | % | |||||||||||||||||||
Operating
expenses
|
20,488 | 42.8 | % | 5,515 | 21.2 | % | 26,003 | 35.2 | % | |||||||||||||||||||
Depreciation
and amortization
|
2,907 | 6.1 | % | 463 | 1.8 | % | $ | 592 | 3,962 | 5.4 | % | |||||||||||||||||
Segment
operating income
|
3,289 | 6.9 | % | 6,952 | 26.7 | % | (6,411 | ) | 3,830 | 5.2 | % | |||||||||||||||||
Total
assets
|
57,289 | 16,095 | 112,806 | 186,190 | ||||||||||||||||||||||||
Capital
expenditures
|
1,464 | 98 | 1,493 | 3,055 | ||||||||||||||||||||||||
For
the thirty-nine weeks ended October 3, 2010
|
||||||||||||||||||||||||||||
Net
revenue
|
$ | 150,422 | 100.0 | % | $ | 91,758 | 100.0 | % | $ | 242,180 | 100.0 | % | ||||||||||||||||
Cost
of sales and occupancy
|
65,700 | 43.7 | % | 47,354 | 51.6 | % | 113,054 | 46.7 | % | |||||||||||||||||||
Operating
expenses
|
61,938 | 41.2 | % | 19,363 | 21.1 | % | 81,301 | 33.6 | % | |||||||||||||||||||
Depreciation
and amortization
|
8,441 | 5.6 | % | 1,315 | 1.4 | % | $ | 2,088 | 11,844 | 4.9 | % | |||||||||||||||||
Segment
operating income
|
14,343 | 9.5 | % | 23,726 | 25.9 | % | (20,727 | ) | 17,342 | 7.2 | % | |||||||||||||||||
Total
assets
|
58,866 | 18,522 | 117,919 | 195,307 | ||||||||||||||||||||||||
Capital
expenditures
|
4,818 | 714 | 2,864 | 8,396 | ||||||||||||||||||||||||
For
the thirty-nine weeks ended September 27, 2009
|
||||||||||||||||||||||||||||
Net
revenue
|
$ | 144,686 | 100.0 | % | $ | 74,889 | 100.0 | % | $ | 219,575 | 100.0 | % | ||||||||||||||||
Cost
of sales and occupancy
|
62,930 | 43.5 | % | 36,882 | 49.2 | % | 99,812 | 45.5 | % | |||||||||||||||||||
Operating
expenses
|
60,417 | 41.8 | % | 16,259 | 21.7 | % | 76,676 | 34.9 | % | |||||||||||||||||||
Depreciation
and amortization
|
8,449 | 5.8 | % | 1,325 | 1.8 | % | $ | 1,426 | 11,200 | 5.1 | % | |||||||||||||||||
Segment
operating income
|
12,890 | 8.9 | % | 20,423 | 27.3 | % | (19,336 | ) | 13,977 | 6.4 | % | |||||||||||||||||
Total
assets
|
57,289 | 16,095 | 112,806 | 186,190 | ||||||||||||||||||||||||
Capital
expenditures
|
5,235 | 828 | 5,845 | 11,908 |
You
should read the following discussion and analysis in conjunction with our
financial statements and related notes included elsewhere in this report. Except
for historical information, the discussion in this report contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. In some cases, you can identify forward-looking
statements by terminology, such as “may,” “should,” “could,” “predict,”
“potential,” “continue,” “expect,” “anticipate,” “future,” “plan,” “believe,”
“estimate” and similar expressions (or the negative of such expressions).
The forward-looking statements in this Form 10-Q include, but are not limited
to, statements regarding our expectations for the growth of the specialty coffee
industry; our expectations regarding green coffee prices and the coffee
commodity market; our plans to open new retail stores; our plans to expand into
new grocery markets; our expectations regarding the outcome and/or impact of
legal proceedings to which we are a party; our expectations regarding the
availability of a line of credit; and our expectations for future revenue,
margins, expenses, unrecognized tax benefits, operating results, inventory
levels and capital expenditures. These statements involve known and unknown
risks, uncertainties and other factors that may cause our actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by the forward-looking
statements. Forward-looking statements reflect our current views with respect to
future events, are based on assumptions, and are subject to risks, uncertainties
and other important factors. Given these risks, uncertainties and other
important factors, you should not place undue reliance on these forward-looking
statements. Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. Except as required by law, we
assume no obligation to update any forward-looking statements publicly, or to
update the reasons actual results could differ materially from those anticipated
in any forward-looking statements, even if new information becomes available in
the future. Important factors that could cause actual results to differ
materially include, but are not limited to, the following:
|
·
|
The recent
recession or a worsening of the United States and global economy could
materially adversely affect our business. Our revenues and performance
depend significantly on consumer confidence and spending, which have
deteriorated due to the recession and may remain depressed for the
foreseeable future. Some of the factors that could influence the levels of
consumer confidence and spending include, without limitation, continuing
conditions in the residential real estate and mortgage markets, access to
credit, labor and healthcare costs, increases in fuel and other energy
costs, elevated unemployment levels and other macroeconomic factors
affecting consumer spending behavior. These and other economic factors
could have a material adverse effect on demand for our products and on our
financial condition and operating
results.
|
|
·
|
Increases in
the cost and decreases in availability of high quality Arabica coffee beans
could impact our profitability and growth of our business. Although we do not purchase
coffee on the commodity markets, price movements in the commodity trading
of coffee impact the prices we pay. Coffee is a trade commodity and, in
general, its price can fluctuate depending on: weather patterns in
coffee-producing countries; economic and political conditions affecting
coffee-producing countries; foreign currency fluctuations; the ability of
coffee-producing countries to agree to export quotas; and general economic
conditions that make commodities more or less attractive investment
options. If costs increase and we are unable to pass along increased
coffee costs, our margin will decrease and our profitability will decrease
accordingly. In addition, if we are not able to purchase sufficient
quantities of high quality Arabica beans due to any of the above factors,
we may not be able to fulfill the demand for our coffee, our revenue may
decrease and our ability to expand our business may be negatively
impacted.
|
|
·
|
A significant
interruption in the operation of our roasting and distribution facility
could potentially disrupt our operations. We have only one roasting and
distribution facility that roasts Peet’s coffee. A significant
interruption in the operation of our roasting and distribution facility,
whether as a result of a natural disaster, pandemic or other causes, could
significantly impair our ability to operate our business. Since we only
roast our coffee to order, we do not carry inventory of roasted coffee in
our roasting plant. Therefore, a disruption in service in our roasting
facility would impact our sales in our retail and specialty channels
almost immediately. Moreover, our roasting and distribution facility and
most of our stores are located near several major earthquake faults. The
impact of a major earthquake on our facilities, infrastructure and overall
operations is difficult to predict and an earthquake could seriously
disrupt our entire
business.
|
13
|
·
|
Complaints or
claims by current, former or prospective employees or governmental
agencies could adversely affect us. We are subject to a variety of
laws and regulations which govern such matters as minimum wages, overtime
and other working conditions, various family leave mandates and a variety
of other laws enacted, or rules and regulations promulgated, by federal,
state and local governmental authorities that govern these and other
employment matters. We have been, and in the future may be, the subject of
complaints or litigation from current, former or prospective employees or
governmental agencies. In addition, successful complaints against our
competitors may spur similar lawsuits against us. For instance, in 2003,
two lawsuits (which have since been settled) were filed against us
alleging misclassification of employment position and sought damages,
restitution, reclassification and attorneys’ fees and costs. On July 14,
2008, a complaint (which has since been settled) was filed alleging that
store managers based in California were not paid overtime wages, were not
provided meal or rest periods, were not provided accurate wage statements
and were not reimbursed for business expenses. In addition, on March 9,
2010, a complaint was filed by exempt employees on their own behalf and on
behalf of employees similarly situated alleging claims for unpaid
overtime, unpaid meal and rest period premiums, unpaid business expenses,
unpaid minimum wages, untimely wages paid at time of termination, untimely
payment of wages, failure to pay vacation wages and non-compliant wage
statements. These types of claims and litigation involving current, former
or prospective employees could divert our management’s time and attention
from our business operations and might potentially result in substantial
costs of defense, settlement or other disposition, which could have a
material adverse effect on our results of operations in one or more fiscal
periods.
|
For a
discussion of additional material risks and uncertainties that we face, see the
discussion in the 2009 Form 10-K titled “Risk Factors.”
Company
Overview and Industry Outlook
Peet’s is
a specialty coffee roaster and marketer of fresh,
deep-roasted whole bean coffee and tea sold through multiple channels
of distribution for home and away-from-home enjoyment. Founded in
Berkeley, California in 1966, Peet's has established a loyal customer base with
strong brand awareness in California. Our growth strategy is based on the
sale of whole bean coffee, tea and high-quality beverages in multiple channels
of distribution including our own retail stores, grocery, home delivery, and
foodservice and office accounts throughout the United States.
As we
grow, we expect our operations to continue to be vertically integrated, allowing
us to control the quality of our product at all stages. We purchase high
quality Arabica coffee beans from countries around the world, and we use our
artisan-roasting technique to bring out the distinctive flavor of our coffees.
Because roasted coffee is perishable, we are committed to delivering our coffee
under the strictest freshness standards. As a result, we inventory very little
roasted coffee. We roast to order and ship fresh coffee daily to our stores and
customers. Control of purchasing, roasting, packaging and distribution of
our coffee allows us to maintain our commitment to freshness, is cost effective,
and enhances our margins and profit potential.
We expect
the specialty coffee industry to continue to grow. We believe that this
growth will be fueled by continued consumer interest in high-quality coffee and
related products. We believe that by offering high-quality products to
consumers throughout the country, we will attract the same loyal customer base
that we have attracted in California.
We
believe growth opportunities exist in all of our distribution channels. We
believe that our specialty sales can expand to geographies where we do not have
a retail presence. Our first priority has been to develop primarily in the
western U.S. markets where we already have a presence and higher customer
awareness. In the long-term, we expect to continue to open new retail stores in
strategic west coast locations that meet our demographic profile and partner
with distributors and companies who share our passion for quality and freshness
and are willing and able to execute accordingly in the foodservice and office
environment. In grocery, we expect to continue to expand into new markets
although the full extent of our penetration will depend upon the growth of the
specialty coffee category in those markets.
The cost
of Arabica coffee traded on New York Board of Trade have risen
dramatically over the last 6 months. We do not purchase this quality of
coffee, however the prices we pay for our coffee is impacted by this market.
Coffee commodity prices are now approximately 50% higher than they were six
months ago. We expect the coffee commodity to continue to be volatile as
worldwide demand, the strength of the dollar, and weather continue to influence
the market. We typically contract for coffee six to 18 months in advance of our
needs with fixed price commitments, so this increase in commodity cost in the
marketplace has not significantly impacted our results to date.
Our net
revenues depend significantly on consumer confidence and spending, which have
deteriorated over that last two years due to the recession and may remain
depressed for the foreseeable future. Despite the recession, we have been able
to grow our revenues by opening new retail stores, adding new foodservice
accounts, growing our business in our current grocery customer base, and to a
lesser extent, the introduction of new products. We
opened two new stores to date and do not plan to open any additional stores for
the remainder of 2010.
14
The
following discussion on results of operations should be read in conjunction with
the condensed consolidated financial statements and accompanying notes and the
other financial data included elsewhere in this report.
Thirteen
weeks ended
|
Thirty-nine
weeks ended
|
|||||||||||||||
October
3,
|
September
27,
|
October
3,
|
September
27,
|
|||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Statement
of income as a percent of net revenue:
|
||||||||||||||||
Net
revenue
|
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost
of sales and related occupancy expenses
|
47.5 | 46.4 | 46.7 | 45.5 | ||||||||||||
Operating
expenses
|
33.1 | 35.2 | 33.6 | 34.9 | ||||||||||||
Transaction
related expenses
|
- | 0.1 | 0.4 | 0.1 | ||||||||||||
General
and administrative expenses
|
7.2 | 7.8 | 7.3 | 8.1 | ||||||||||||
Depreciation
and amortization expenses
|
4.9 | 5.4 | 4.9 | 5.1 | ||||||||||||
Income
from operations
|
7.3 | 5.2 | 7.2 | 6.4 | ||||||||||||
Interest
income
|
- | - | - | 0.1 | ||||||||||||
Income
before income taxes
|
7.3 | 5.2 | 7.2 | 6.4 | ||||||||||||
Income
tax provision
|
2.6 | 1.8 | 2.6 | 2.3 | ||||||||||||
Net
income
|
4.7 | % | 3.3 | % | 4.6 | % | 4.1 | % | ||||||||
Percent
of net revenue by business segment:
|
||||||||||||||||
Retail
stores
|
62.1 | % | 64.8 | % | 62.1 | % | 65.9 | % | ||||||||
Specialty
sales
|
37.9 | 35.2 | 37.9 | 34.1 | ||||||||||||
Percent
of net revenue by business category:
|
||||||||||||||||
Whole
bean coffee and related products
|
54.3 | % | 52.7 | % | 54.6 | % | 52.6 | % | ||||||||
Beverages
and pastries
|
45.7 | 47.3 | 45.4 | 47.4 | ||||||||||||
Cost
of sales and related occupancy expenses as a percent of segment
revenue:
|
||||||||||||||||
Retail
stores
|
44.3 | % | 44.2 | % | 43.7 | % | 43.5 | % | ||||||||
Specialty
sales
|
52.8 | 50.3 | 51.6 | 49.2 | ||||||||||||
Operating
expenses as a percent of segment revenue:
|
||||||||||||||||
Retail
stores
|
41.1 | % | 42.8 | % | 41.2 | % | 41.8 | % | ||||||||
Specialty
sales
|
20.0 | 21.2 | 21.1 | 21.7 | ||||||||||||
Percent
increase from prior year:
|
||||||||||||||||
Net
Revenue
|
8.5 | % | 7.9 | % | 10.3 | % | 6.8 | % | ||||||||
Retail
stores
|
4.0 | 4.3 | 4.0 | 5.7 | ||||||||||||
Specialty
sales
|
16.8 | 15.4 | 22.5 | 8.8 | ||||||||||||
Cost
of sales and related occupancy expenses
|
11.2 | 6.3 | 13.3 | 3.5 | ||||||||||||
Operating
expenses
|
2.0 | 5.4 | 6.0 | 5.3 | ||||||||||||
General
and administrative expenses
|
(0.4 | ) | 10.2 | (0.6 | ) | 9.5 | ||||||||||
Depreciation
and amortization expenses
|
(0.4 | ) | 25.8 | 5.8 | 19.2 | |||||||||||
Selected
operating data:
|
||||||||||||||||
Number
of retail stores in operation
|
||||||||||||||||
Beginning
of the period
|
193 | 192 | 192 | 188 | ||||||||||||
Store
openings
|
1 | 3 | 2 | 7 | ||||||||||||
Store
closures
|
(1 | ) | - | (1 | ) | - | ||||||||||
End
of the period
|
193 | 195 | 193 | 195 |
Thirteen
Weeks Ended October 3, 2010 Compared to Thirteen Weeks Ended September 27,
2009
Net
revenue
Net
revenue for the thirteen weeks ended October 3, 2010 increased $6.3 million, or
8.5%, compared to the corresponding period in 2009. Sales of whole bean and
related products increased 11.9% to $43.6 million. Net revenue from beverages
and pastries increased 4.8% to $36.6 million.
In the
retail segment, net revenue increased $1.9 million, or 4.0%, compared to the
corresponding period in 2009 primarily as a result of growth in beverage and
pastries sales from stores operating for over one year. Sales of whole bean
coffee and related products in the retail segment increased by 1.5% to $13.1
million, while sales of beverages and pastries increased by 5.0% to $36.6
million. The slower growth in whole bean and related products was primarily due
to continuing cannibalization of bean sales in retail stores as we increased the
availability and sales levels of Peet’s coffee in grocery stores. Beverage and
pastries sales were driven by increased traffic and in part by new product
introductions included in our new reach-in coolers.
In the
specialty sales segment, net revenue increased $4.4 million, or 16.8%, compared
to the third quarter of 2009, as summarized by business channel below. The
growth in net revenue in grocery was due primarily to increased share of Peet’s
sales in existing markets and to the introduction of Godiva coffee in the fourth
quarter of 2009. Net revenue in foodservice and office coffee sales increased
primarily due to new accounts added over the last 12 months. Net revenue
in the home delivery channel was consistent with the corresponding period in
2009.
Thirteen
weeks ended
|
||||||||||||||||
(dollars
in thousands)
|
October
3, 2010
|
September
27, 2009
|
Increase/(Decrease)
|
|||||||||||||
Grocery
|
$ | 18,117 | $ | 14,619 | $ | 3,498 | 23.9 | % | ||||||||
Foodservice
and office
|
8,648 | 7,769 | 879 | 11.3 | % | |||||||||||
Home
delivery
|
3,652 | 3,654 | (2 | ) | -0.1 | % | ||||||||||
Total
specialty
|
$ | 30,417 | $ | 26,042 | $ | 4,375 | 16.8 | % |
Cost
of sales and related occupancy expenses
Cost of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales increased from 46.4% in the third quarter of 2009 to
47.5% in the third quarter of 2010. The increase from last year was due to
higher commodity costs, specifically coffee and milk, and a shift in revenue mix
towards the grocery channel where both Peet’s and Godiva brands have lower gross
margins than our retail business.
In the
retail segment, cost of sales and related occupancy expenses as a percent of net
revenue remained flat as higher commodity costs were offset by sales leverage of
occupancy costs.
In the
specialty segment, cost of sales and related occupancy expenses as a percent of
net revenue increased 2.4% primarily due to the revenue mix impact of Godiva
branded coffee, which has a lower margin than our Peet’s brand, lower net
realized price in our Peet’s brand in grocery, and increased coffee
costs.
For the
remainder of the year, we expect cost of sales and related occupancy expenses as
a percent of revenue to remain above last year levels, due to the revenue mix
shift toward the specialty segment and higher coffee and milk
prices.
Operating
expenses
Operating
expenses consist of both retail and specialty segment operating costs, such as
employee labor and benefits, sales commissions, repairs and maintenance,
supplies, training, travel, banking and card processing fees. Operating expenses
as a percentage of net revenue decreased 2.1% to 33.1%. The decrease was
primarily due to the revenue mix shift from the retail segment towards the
specialty segment, which has lower operating costs, and leverage of our retail
store payroll and overhead costs.
16
In the
retail segment, operating expenses as a percent of net revenue decreased 1.7%
primarily due to improvements in store labor productivity, leverage of above
store overhead costs and lower legal and asset impairment
costs.
In the
specialty segment, operating expenses as a percent of net revenue decreased 1.2%
primarily due to a favorable lower distribution costs for grocery as we had a
higher mix of business shipped directly to customers, rather than through our
direct store delivery system, partially offset by lower grocery
pricing.
We expect
operating expenses as a percent of net revenue in 2010 to continue to improve
primarily due to the continued revenue mix shift in business towards the
specialty segment.
Transaction
related expenses
Transaction
related expenses include expenses incurred by us in connection with the proposed
acquisition of Diedrich Coffee. We did not recognize any transaction related
expenses during the third quarter of 2010.
General
and administrative expenses
General
and administrative expenses decreased to $5.7 million compared to $5.8 million
for the corresponding period last year primarily due to lower marketing costs
and legal expenses, partially offset by higher compensation expenses and
technology services.
Depreciation
and amortization expense
Depreciation
and amortization expense was consistent with the corresponding period last
year.
Interest
income, net
We invest
in U.S. government, agency, municipal and equity securities. Interest income
includes interest income and gains or losses from the sale of these instruments.
Interest income was lower compared to the corresponding period last year due to
lower interest rates on investments, which was offset by interest expense on
higher balances in our deferred compensation plan.
Income
tax provision
The
effective income tax rate for the third quarter of 2010 is 35.7% compared to
35.3% during the third quarter of 2009 due to normal quarter to quarter rate
fluctuations.
The
Company does not expect unrecognized tax benefits to change significantly within
the next 12 months.
Net
revenue
Net
revenue for the thirty-nine weeks ended October 3, 2010 increased $22.6 million,
or 10.3%, compared to the corresponding period in 2009. Sales of whole bean and
related products increased 14.5% to $132.2 million. Net revenue from beverages
and pastries increased 5.6% to $109.9 million. Beverage and pastries sales were
driven by increased traffic and in part by new product introductions included in
our new reach-in coolers.
In the
retail segment, net revenue increased $5.7 million, or 4.0%, compared to the
corresponding period in 2009 primarily as a result of increased sales from
stores operating for over one year. Sales of whole bean coffee and related
products in the retail segment decreased slightly to $40.6 million from $40.7
million, while sales of beverages and pastries increased by 5.6% to $109.9
million. The decrease in whole bean and related products sales was primarily due
to continuing cannibalization of bean sales in retail stores as we increased the
availability and sales levels of Peet’s coffee in grocery
stores.
17
In the
specialty sales segment, net revenue increased $16.9 million, or 22.5%, compared
to the thirty-nine weeks ending September 27, 2009, as summarized by business
channel below. The growth in net revenue in grocery was due primarily to
increased share of Peet’s sales in existing markets and to a lesser extent, the
introduction of Godiva coffee in the fourth quarter of 2009. Net revenue in
foodservice and office coffee sales increased due to new accounts added over the
last 12 months. Net revenue in the home delivery channel decreased
slightly compared to the corresponding period in 2009 due to continuing
cannibalization from our grocery business expansion.
Thirty-nine
weeks ended
|
||||||||||||||||
(dollars
in thousands)
|
October
3, 2010
|
September
27, 2009
|
Increase/(Decrease)
|
|||||||||||||
Grocery
|
$ | 54,563 | $ | 41,841 | $ | 12,722 | 30.4 | % | ||||||||
Foodservice
and office
|
25,575 | 21,330 | 4,245 | 19.9 | % | |||||||||||
Home
delivery
|
11,620 | 11,718 | (98 | ) | -0.8 | % | ||||||||||
Total
specialty
|
$ | 91,758 | $ | 74,889 | $ | 16,869 | 22.5 | % |
Cost
of sales and related occupancy expenses
Cost of
sales and related occupancy expenses consist of product costs, including
manufacturing costs, rent and other occupancy costs. As a percent of net
revenue, cost of sales increased from 45.5% in the thirty-nine weeks ending
September 27, 2009 to 46.7% in the thirty-nine weeks ending October 3, 2010. The
increase from last year was due to higher commodity costs, specifically coffee
and milk, and a shift in revenue mix towards the grocery channel where both
Peet’s and Godiva brands have lower gross margins than our retail
business.
In the
retail segment, cost of sales and related occupancy expenses as a percent of net
revenue increased 0.2% as higher commodity costs were largely offset by sales
leverage of occupancy costs.
In the
specialty segment, cost of sales and related occupancy expenses as a percent of
net revenue increased 2.4% primarily due to the mix impact of Godiva coffee
brand, which has a lower margin than our Peet’s brand, lower pricing in our
grocery business, and increased coffee costs.
Operating
expenses
Operating
expenses consist of both retail and specialty segment operating costs, such as
employee labor and benefits, repairs and maintenance, supplies, training,
travel, banking and card processing fees. Operating expenses as a percentage of
net revenue decreased 1.3% to 33.6%. The decrease was primarily due to the mix
shift from retail towards the specialty segment, which has lower operating costs
and leverage of our retail overhead and improvements in store payroll
costs.
In the
retail segment, operating expenses as a percent of net revenue decreased 0.6%
primarily due to leveraging our retail overhead costs and improvements in store
labor productivity.
In the
specialty segment, operating expenses as a percent of net revenue decreased 0.6%
primarily due to a lower distribution costs for grocery as we had a higher mix
of business shipped directly to customers rather than through our direct store
delivery system, partially offset by lower grocery pricing.
Transaction
related expenses
Transaction
related expenses in 2010 consists of $1.0 million of external professional and
legal fees incurred to comply with a subpoena we received from the Federal Trade
Commission in connection with its anti-trust review of the proposed Green
Mountain Coffee Roasters’ acquisition of Diedrich Coffee. During the
corresponding period last year, we incurred $128,000 in legal and professional
fees pursuing the acquisition of Diedrich Coffee.
18
General
and administrative expenses
General
and administrative expenses decreased slightly to $17.7 million, compared to
$17.8 million for the corresponding period last year due to lower marketing
costs during the thirty-nine weeks compared to the same prior year period,
offset primarily by increased compensation expenses, technology services and
recruiting and professional fees.
Depreciation
and amortization expense
Depreciation
and amortization expense increased to $11.8 million, compared to $11.2 million
for the corresponding period last year. The increase was primarily due to the
implementation of our two phases of the ERP system in the third and fourth
quarter of 2009, respectively.
Interest
income, net
We invest
in U.S. government, agency, municipal and equity securities. Interest income
includes interest income and gains or losses from the sale of these instruments.
Interest income of $6,000 was lower compared to the corresponding period last
year due to lower interest rates on investments, which was offset by interest
expense on higher balances in our deferred compensation plan. During the
corresponding period of 2009 we earned $0.1 million.
Income
tax provision
The
effective income tax rate for the thirty-nine weeks ending October 3, 2010 is
36.2% compared to 36.6% during the thirty-nine weeks ending September 27, 2009
due to normal quarter to quarter rate fluctuations. The Company does not expect
unrecognized tax benefits to change significantly within the next 12
months.
Liquidity
and Capital Resources
At
October 3, 2010 we had $28.6 million in cash and cash
equivalents. Working capital was $68.7 million as of October 3,
2010.
Net cash
provided by operating activities was $5.8 million for the thirty-nine weeks
ended October 3, 2010 compared to $19.1 million for the same prior year period.
Operating cash flows were lower than the prior year period primarily due to
changes in working capital. Coffee inventories increased over the prior
year due primarily to an increase of green coffee pounds required to support our
growth compared to atypically low inventory levels at the same time last year
and an increase in average costs per pound.
Net cash
used in investing activities was $7.8 million for the thirty-nine weeks ended
October 3, 2010 compared to $2.9 million in the prior year period. Investing
activities primarily relate to purchases of property, plant and equipment and
maturities and purchases of marketable securities. During the thirty-nine week
period ended October 3, 2010, we purchased property, plant and equipment
totaling $8.4 million primarily related to two new stores, improvements to
existing stores, an additional packaging line and other equipment and machinery
for our roasting facility, and information technology software and hardware.
During the thirty-nine week period ended October 3, 2010, there were no
purchases or proceeds from maturities of marketable securities and proceeds from
the release of restricted investments totaled $0.6 million for the thirty-nine
week period ended October 3, 2010.
Net cash used by financing activities
for the thirty-nine weeks ended October 3, 2010 was $17.3 million compared to
$3.9 million for the same prior year period. Financing activities
primarily relate to repurchases of our common stock totaling $28.2 million,
offset by proceeds from stock option exercises of $9.3
million.
The
Company’s obligations under the line of credit are guaranteed by the Company’s
wholly-owned subsidiary, Peet’s Operating Company, and secured by substantially
all of the Company’s and Peet’s Operating Company’s personal property. The
line of credit had an original maturity date of December 1, 2009, with an option
by the Company to extend the maturity date to December 1, 2010, which was
exercised pursuant to the terms of the credit agreement.
19
Amounts
drawn under the credit agreement will bear interest (computed on the basis of a
360-day year, actual days elapsed) either (i) at a fluctuating rate per annum of
1.50% above, for any day, the rate of interest equal to LIBOR then in effect for
delivery for a 1 month period, or (ii) at a fixed rate per annum of 1.50% above
LIBOR in effect on the first day of the applicable period commencing on a
business day and continuing for 1, 3, or 6 months, as designated by the Company,
during which all or a portion of the outstanding principal balance will bear
interest determined in relation to LIBOR.
The
credit agreement contains customary affirmative and negative covenants,
including a requirement to maintain the Company’s financial condition in
accordance with certain ratios and thresholds, and events of default that permit
the Bank to accelerate the Company’s outstanding obligations, including
nonpayment of principal, interest, fees or other amounts, violation of
covenants, inaccuracy of representations and warranties and upon the occurrence
of bankruptcy and other adverse material change in the Company’s financial
condition. The Company is required to comply with the following financial
covenants as of each fiscal quarter end, as defined in the credit agreement: a
minimum Current Ratio not less than 0.75 to 1.0, a Leverage Ratio not greater
than 1.75 to 1.0, an EBITDAR Coverage Ratio not less than 1.75 to 1.0, and net
income after tax provision not less than $1.00.
During
the quarter ended and as of October 3, 2010, there were no borrowings under this
agreement. Total unused borrowing capacity under the credit agreement was $25.0
million as of October 3, 2010. As of October 3, 2010, we were in compliance with
these financial covenants.
We
anticipate entering into a new line of credit when our existing line expires on
December 1, 2010.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
We invest
excess cash in equity securities and interest-bearing, U.S. government, agency,
and municipal securities. These financial instruments are subject to stock
market volatility and fluctuations of daily interest rates. Therefore our
investment portfolio is exposed to market risk from these changes.
The
supply and price of coffee are subject to significant volatility and can be
affected by multiple factors in the producing countries, including weather,
political and economic conditions. In addition, green coffee bean prices have
been affected in the past, and may be affected in the future, by the actions of
certain organizations and associations that have historically attempted to
influence commodity prices of green coffee beans through agreements establishing
export quotas or restricting coffee supplies worldwide.
We
currently use fixed-price purchase commitments, but in the past have used and
may potentially in the future use coffee futures and coffee futures options to
manage coffee supply and price risk.
Fixed-Price
and Not-Yet-Priced Purchase Commitments
We enter
into fixed-price purchase commitments in order to secure an adequate supply of
quality green coffee beans and fix our cost of green coffee beans. These
commitments are made with established coffee brokers and are denominated in U.S.
dollars. We also enter into “not-yet-priced” commitments based on a fixed
premium over the New York “C” market with the option to fix the price at any
time. As of October 3, 2010, we had approximately $9.6 million in open
fixed-priced purchase commitments and approximately $28.1 million in
not-yet-priced commitments for a total of approximately $37.7 million with
delivery dates ranging from October 2010 through September 2011. We believe,
based on relationships established with our suppliers, that the risk of
non-delivery on such purchase commitments is low.
Item
4. Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed under the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.
20
As of
October 3, 2010, the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures. Based on the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that our disclosure controls and procedures were
effective as of the end of the quarter covered by this report at the
reasonable-assurance level.
There
have been no changes in our internal controls over financial reporting during
the fiscal quarter ended October 3, 2010 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART
II - OTHER INFORMATION
Item
1. Legal Proceedings
We are
party to the significant legal proceedings described below. Based on our
experience, we believe that any damage amounts claimed in the specific matters
discussed below are not meaningful indicators of our potential liability. We
believe that we have valid defenses to these legal proceedings and are defending
the matters vigorously. Nevertheless, the outcome of any litigation is
inherently uncertain. We are currently unable to estimate the remaining possible
losses, if any, in the unresolved legal proceedings described below. Should any
one of these proceedings against us, or a combination of more than one, be
successful, or should we determine to settle any or a combination of these
matters on unfavorable terms, we may be required to pay substantial sums, which
could have a material impact on our consolidated financial position or results
of operations.
On
July 14, 2008, a complaint was filed against us in California Superior
Court, Alameda County, by three former employees on behalf of themselves and all
other California store managers. The complaint alleges that store managers based
in California were not paid overtime wages, were not provided meal or rest
periods, were not provided accurate wage statements and were not reimbursed for
business expenses. The plaintiffs seek injunctive relief, monetary damages,
penalties, costs and attorneys’ fees, and prejudgment interest. On
December 16, 2009, we reached a tentative settlement pursuant to which we
would deny any liability but agree to maximum payment of $2.6 million. The
notice period to the Class concluded on August 4, 2010, and the California
Superior Court approved the final settlement on September 1, 2010. Based
on the final settlement amount, we recorded into income a credit of $93,000
during the thirteen weeks ended October 3, 2010 based on the difference between
the original $2.6 million recorded liability and the anticipated settlement
payment.
On April
1, 2010, we were served with the First Amended Complaint filed in California
Superior Court by Amber Morgan and Norna Lai, on behalf of themselves and all
other non-exempt employees similarly situated in the state of California naming
us as a defendant. The First Amended Complaint alleges claims for unpaid
overtime, unpaid meal and rest period premiums, unpaid business expenses, unpaid
minimum wages, untimely wages paid at time of termination, untimely payment of
wages, failure to pay vacation wages, violation of California Business &
Professions Code section 17200 and non-compliant wage statements. The plaintiffs
seek injunctive relief, restitution, monetary damages, penalties under the
California Labor Code Private Attorneys General Act, costs and attorneys’ fees,
penalties, and prejudgment interest. On April 30, 2010, we filed an answer
denying the allegations set forth in the complaint and asserting a number of
affirmative defenses thereto. On August 27, 2010, the plaintiffs filed a Second
Amended Complaint to which we filed its answer on September 27, 2010. At
this time, it is not feasible to predict the outcome of or a range of loss,
should a loss occur, from this proceeding.
On
February 8, 2010, we received a letter from a law firm alleging that we and
several other well known sellers of coffee violate the California Safe Drinking
Water and Toxic Enforcement Act of 1986, commonly known as Proposition 65, by
failing to warn consumers that “ready-to-drink” coffee contains a substance that
is allegedly known to cause cancer. Under Proposition 65, the letter commenced a
60-day period during which the California Attorney General was required to
decide whether to take over the matter. That 60-day period has now expired, the
Attorney General has declined to act, and the law firm that served the letter on
the Company, as expected, filed a complaint on April 13, 2010, naming us among
others. The complaint seeks statutory penalties and costs of enforcement,
as well as a court order that we are required to provide warnings and other
notices to customers. As this matter is at a very early stage, we are not
able to predict the probability of the outcome or estimate of loss, if any,
related to this matter.
21
We are
involved in various other litigation and governmental proceedings, not described
above, that arise in the normal course of business. While it is not possible to
determine with certainty the ultimate outcome or the duration of any such
litigation or governmental proceedings, we believe, based on current knowledge
and the advice of counsel, that such litigation and proceedings will not have a
material impact on our consolidated financial position or results of
operations.
Item
1A. Risk Factors
Not
applicable.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Information
regarding purchases of the Company’s securities by or on behalf of the Company
is set forth in the table below.
Repurchases
of Equity Securities
Total
Number of
|
||||||||||||||||
Shares
Purchased as
|
||||||||||||||||
Total
Number of
|
Part
of Publicly
|
Maximum
Number of Shares that
|
||||||||||||||
Shares
|
Average
Price
|
Announced
Plans or
|
May
Yet Be Purchased Under the
|
|||||||||||||
Period
|
Purchased
|
Paid
per Share
|
Programs
|
Plans
or Programs (1)
|
||||||||||||
July
5, 2010 -
|
||||||||||||||||
August
8, 2010
|
240,629 | $ | 39.53 | 885,731 | 114,269 | |||||||||||
August
9, 2010 -
|
||||||||||||||||
September
5, 2010
|
109,050 | $ | 36.57 | 994,781 | 1,005,219 | |||||||||||
September
6, 2010 -
|
||||||||||||||||
October
3, 2010
|
- | $ | - | 994,781 | 1,005,219 |
(1)
|
Repurchases
were made pursuant a stock repurchase program announced on October 27,
2008, providing for the additional purchase of up to one million shares of
the Company’s common stock, with no deadline for completion.
On September 9, 2010, we announced a new stock purchase program
providing for the purchase up to one million additional shares of the
Company’s common stock. This program has no deadline for
completion. Purchases under the Company’s stock purchase programs
may be made from time to time on the open market at prevailing market
prices or in negotiated transactions off the
market.
|
Item
5. Other Information
Item
6. Exhibits
Exhibit
|
Description
|
|
3.1
|
Amended
and Restated Articles of Incorporation. Incorporated by reference to
Exhibit 3.6 to the Company’s Amendment No. 2 to its Registration Statement
on Form S-1 filed with the Securities and Exchange Commission on December
22, 2000 (File. No. 333-47976).
|
|
3.2
|
Amended
and Restated Bylaws. Incorporated by reference to Exhibit 3.8 to the
Company’s Amendment No. 1 to its Registration Statement on Form S-1 filed
with the Securities and Exchange Commission on December 1, 2000 (File. No.
333-47976).
|
22
4.1
|
Form
of common stock certificate. Incorporated by reference to Exhibit 4.1 to
the Company’s Amendment No. 2 to its Registration Statement on Form S-1
filed with the Securities and Exchange Commission on December 22, 2000
(File. No. 333-47976).
|
|
31.1
|
Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
31.2
|
Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule
13a-14(a) under the Securities Exchange Act of 1934, as
amended.
|
|
32.1
|
Certification
of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.
|
|
32.2
|
Certification
of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to
Section 906 of Sarbanes-Oxley Act of
2002.
|
23
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
PEET’S
COFFEE & TEA, INC.
|
||
Date:
November 12, 2010
|
By:
|
/s/ Thomas
P. Cawley
|
Thomas
P. Cawley
|
||
Vice
President, Chief Financial Officer and
Secretary
|