UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 000-51535

 

CARIBOU COFFEE COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota (State or other jurisdiction of incorporation or organization)		41-1731219 (I.R.S. Employer Identification No.)
3900 Lakebreeze Avenue North Brooklyn Center, Minnesota (Address of principal executive offices)		55429 (Zip Code)

Registrant’s Telephone Number, Including Area Code: (763) 592-2200

     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 þ 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 during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ Noo

     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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On August 3, 2011, 20,739,108 shares of Registrant’s $0.01 par value common stock were outstanding.

 

 

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended July 3, 2011

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements			3
Condensed Consolidated Statements of Operations			3
Condensed Consolidated Balance Sheets			4
Condensed Consolidated Statement of Changes in Equity			5
Condensed Consolidated Statements of Cash Flows			6
Notes to Condensed Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3. Quantitative and Qualitative Disclosures About Market Risk			29
Item 4. Controls and Procedures			29
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults Upon Senior Securities			29
Item 4. Submission of Matters to a Vote of Security Holders			29
Item 5. Other Information			29
Item 6. Exhibits			30
Signature			31
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

See accompanying notes.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 3,				July 4,				July 3,				July 4,
		2011				2010				2011				2010
		(In thousands, except for per share amounts)
						(Unaudited)
Coffeehouse sales		$	60,032			$	57,751			$	117,643			$	113,348
Commercial and franchise sales			20,238				11,134				34,902				22,587
Total net sales			80,270				68,885				152,545				135,935
Cost of sales and related occupancy costs			37,923				30,551				71,159				61,950
Operating expenses			26,811				25,067				52,221				50,029
Depreciation and amortization			2,768				3,028				5,704				6,172
General and administrative expenses			8,142				7,633				15,940				14,142
Operating income			4,626				2,606				7,521				3,642
Other income (expense):
Interest income			7				5				12				10
Interest expense			(58	)			(64	)			(114	)			(171	)
Income before provision for (benefit from) income taxes			4,575				2,547				7,419				3,481
Provision for (benefit from) income taxes			47				20				(21,287	)			(138	)
Net income			4,528				2,527				28,706				3,619
Less: Net income attributable to noncontrolling interest			103				106				210				160
Net Income attributable to Caribou Coffee Company, Inc.		$	4,425			$	2,421			$	28,496			$	3,459
Basic net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.22			$	0.12			$	1.43			$	0.18
Diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.21			$	0.12			$	1.38			$	0.17
Basic weighted average number of shares outstanding			19,995				19,515				19,925				19,514
Diluted weighted average number of shares outstanding			20,670				20,520				20,605				20,381

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

		July 3,				January 2,
		2011				2011
		In thousands, except per share amounts
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	32,461			$	23,092
Accounts receivable, net			10,469				8,096
Other receivables, net			1,469				1,227
Income tax receivable			14				—
Inventories			23,158				25,931
Deferred tax assets — current			3,285				—
Prepaid expenses and other current assets			939				1,122
Total current assets			71,795				59,468
Property and equipment, net of accumulated depreciation and amortization			37,790				41,075
Restricted cash			837				837
Deferred tax assets — non-current			17,999				—
Other assets			382				345
Total assets		$	128,803			$	101,725
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	8,016			$	8,080
Accrued compensation			5,574				5,954
Accrued expenses			7,371				6,916
Deferred revenue			6,237				8,726
Total current liabilities			27,198				29,676
Asset retirement liability			1,231				1,194
Deferred rent liability			5,446				6,296
Deferred revenue			2,091				2,091
Income tax liability			—				2
Total long term liabilities			8,768				9,583
Equity:
Caribou Coffee Company, Inc. Shareholders’ equity:
Preferred stock, par value $.01, 20,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $.01, 200,000 shares authorized; 20,734 and 20,141 shares issued and outstanding at July 3, 2011 and January 2, 2011, respectively			207				202
Additional paid-in capital			130,877				129,026
Accumulated comprehensive income			61				12
Accumulated deficit			(38,445	)			(66,941	)
Total Caribou Coffee Company, Inc. shareholders’ equity			92,700				62,299
Noncontrolling interest			137				167
Total equity			92,837				62,466
Total liabilities and equity		$	128,803			$	101,725

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited)
(in thousands)

																		Accumulated
		Common Stock								Additional								Other
		Number of								Paid-In				Noncontrolling				Comprehensive				Accumulated
		Shares				Amount				Capital				Interest				Income				Deficit				Equity
Balance, January 2, 2011			20,141			$	202			$	129,026			$	167			$	12			$	(66,941	)		$	62,466
Net income			—				—				—				210				—				28,496				28,706
Changes in fair value of derivative financial instruments			—				—				—				—				49				—				49
Comprehensive income																										$	28,755
Share based compensation			—				—				863				—				—				—				863
Options exercised			289				2				991				—				—				—				993
Restricted shares issued, net of cancellations			304				3				(3	)			—				—				—				—
Distribution of noncontrolling interest			—				—				—				(240	)			—				—				(240	)
Balance, July 3, 2011			20,734			$	207			$	130,877			$	137			$	61			$	(38,445	)		$	92,837

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Twenty-Six Weeks Ended
		July 3,				July 4,
		2011				2010
		(In thousands)
		(Unaudited)
Operating activities
Net income attributable to Caribou Coffee Company, Inc.		$	28,496			$	3,459
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization			6,688				7,140
Amortization of deferred financing fees			51				97
Noncontrolling interest			210				160
Stock-based compensation			863				618
Deferred income taxes			(21,284	)			—
Other			73				(132	)
Changes in operating assets and liabilities:
Accounts receivable and other receivables			(2,629	)			516
Inventories			2,773				(11,498	)
Prepaid expenses and other assets			95				342
Accounts payable			117				339
Accrued expenses and other liabilities			(718	)			(3,923	)
Deferred revenue			(2,489	)			(2,635	)
Net cash provided (used) by operating activities			12,246				(5,517	)
Investing activities
Payments for property and equipment			(3,630	)			(1,562	)
Proceeds from the disposal of property			—				6
Net cash used in investing activities			(3,630	)			(1,556	)
Financing activities
Distribution of noncontrolling interest			(240	)			(150	)
Issuance of common stock			993				205
Payment of debt financing fees			—				(299	)
Stock repurchase			—				(73	)
Net cash provided (used) by financing activities			753				(317	)
Increase (decrease) in cash and cash equivalents			9,369				(7,390	)
Cash and cash equivalents at beginning of period			23,092				23,578
Cash and cash equivalents at end of period		$	32,461			$	16,188
Supplemental disclosure of cash flow information
Noncash financing and investing transactions:
Accrual for leasehold improvements, furniture and equipment		$	172			$	—

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The “Company” and “Caribou” refer to Caribou Coffee Company, Inc. and its affiliates, collectively.

     The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments considered necessary for the fair presentation of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K (File No. 000-51535).

     Principles of Consolidation

     The Company’s condensed consolidated financial statements include the accounts of Caribou Coffee Company, Inc., affiliates that it controls and a third party finance company (which exists for purposes of the Company’s revolving credit facility, as described in the Company’s Annual Report on Form 10-K) where the Company is the primary beneficiary in a variable interest entity. The affiliates are Caribou MSP Airport, a partnership in which the Company owns a 49% interest and that operates six coffeehouses, and Caribou Coffee Development Company, Inc., a licensor of Caribou Coffee branded coffeehouses. The Company controls the daily operations of Caribou Coffee Development Company, Inc. and accordingly consolidates their results of operations. The Company provided a loan to its partner in Caribou MSP Airport for all of the partner’s equity contribution to the venture. Consequently, the Company bears all the risk of loss but does not control all decisions that may have a significant effect on the success of the venture. Therefore, the Company consolidates the Caribou MSP Airport, as it is the primary beneficiary in this variable interest entity. All material intercompany balances and transactions between Caribou Coffee Company, Inc., Caribou MSP Airport and Caribou Coffee Development Company, Inc. and the third party finance company have been eliminated in consolidation.

     Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results may differ from those estimates, and such differences may be material to the consolidated financial statements.

     Fiscal Year End

     The Company’s fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

     The Company’s sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended July 3, 2011 are not necessarily indicative of future results that may be expected for the year ending January 1, 2012.

2. Summary of Significant Accounting Policies

     Revenue Recognition

     The Company recognizes retail coffeehouse sales for products and services when payment is tendered at the point of sale. Sales tax collected from customers is presented net of amounts expected to be remitted to various tax jurisdictions. Accordingly, sales taxes have no effect on the Company’s reported net sales in the accompanying statements of operations.

     Revenue from the sale of products to commercial, franchise or on-line customers is recognized when ownership and price risk of the products are legally transferred to the customer, which is generally upon the shipment of goods. Revenues include any applicable shipping and handling costs invoiced to the customer, and the expense of such shipping and handling costs is included in cost of sales.

     The Company sells stored value cards of various denominations. Cash receipts related to stored value card sales are deferred when initially received and revenue is recognized when the card is redeemed and the related products are delivered to the customer. Such amounts are classified as a current liability on the Company’s condensed consolidated balance sheets. The Company will honor all stored value cards presented for payment; however, the Company has determined that the likelihood of redemption is remote for certain card balances due to long periods of inactivity. In these circumstances, to the extent management determines there is no requirement for remitting balances to government agencies under unclaimed property laws, card and certificate balances may be recognized in the consolidated statements of operations. The Company uses the redemption recognition method and recognizes the estimated value of abandoned cards as a percentage of every stored value card redeemed and includes the amount in coffeehouse sales. Such amounts represent the Company’s experience regarding unused balances related to stored value cards redeemed. The Company excludes stored value card balances sold in jurisdictions which require remittance of unused balances to government agencies under unclaimed property laws.

     Territory development fees and initial franchise fees are recognized upon substantial performance of services for a new territory or coffeehouse, which is generally upon the opening of a new coffeehouse. Royalties based upon a percentage of reported sales are recognized on a monthly basis when earned. Cash payments received in advance for territory development fees or initial franchise fees are recorded as deferred revenue until earned.

     All revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates. The Company periodically participates in trade-promotion programs such as shelf price reductions and consumer coupon programs that require the Company to estimate and accrue the expected cost of such programs. Coupons are recognized as a liability when distributed based upon expected consumer redemptions. The Company maintains liabilities based on historical experience and management’s judgment at the end of each period for the estimated expenses incurred, but unpaid for these programs

     Allowance for Doubtful Accounts

     Allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. A summary of the allowance for doubtful accounts is as follows (in thousands):

		July 3,				January 2,
		2011				2011
Allowance for doubtful accounts — accounts receivable		$	1			$	20
Allowance for doubtful accounts — other receivables			218				192

     Operating Leases and Rent Expense

     Certain of the Company’s lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Rent expense is recorded on a straight-line basis over the initial lease term and renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “accrued expenses” and “deferred rent liability” in the consolidated balance sheets. Contingent rents, including those based on a percentage of retail

sales over stated levels, and rental payment increases based on a contingent future event are accrued over the respective contingency periods when the achievement of such targets or events are deemed to be probable by the Company.

3. Recent Accounting Pronouncements

     In January 2010, the FASB issued further guidance under ASC No. 820, Fair Value Measurements and Disclosures (“ASC 820”). ASC 820 requires disclosures about the transfers of investments between levels in the fair value hierarchy and disclosures relating to the reconciliation of fair value measurements using significant unobservable inputs (level 3 investments). ASC 820 is effective for the fiscal years and interim periods beginning after December 15, 2010. The Company adopted the update on January 3, 2011. The adoption of ASC 820 did not have a material impact on the Company’s condensed consolidated financial statements.

     In June 2011, the FASB issued authoritative guidance for the presentation of comprehensive income. The guidance amended the reporting of Other Comprehensive Income (“OCI”) by eliminating the option to present OCI as part of the Statement of Changes in Shareholder’s Equity. The amendment will not impact the accounting for OCI, but only its presentation in the Company’s consolidated financial statements. Under this new guidance, an entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive, statements. This guidance is effective for publicly traded companies as of the beginning of a fiscal year that begins after December 15, 2011 and interim and annual periods thereafter. Early adoption is permitted, but full retrospective application is required. As the Company currently reports comprehensive income within its Statement of Stockholder’s Equity, the adoption of these rules will impact the presentation of the Company’s consolidated financial statements beginning in the first quarter of 2012.

4. Derivative Financial Instruments

     The Company evaluates various strategies in managing its exposure to market-based risks, such as entering into hedging transactions to manage its exposure to fluctuating dairy commodity prices.

     The Company records all derivatives on the condensed consolidated balance sheets at fair value. For those cash flow hedges that have been designated and qualify as an effective accounting hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into net earnings when the hedged exposure affects net income. For those cash flow hedges that are not designated or do not qualify as an effective accounting hedge, the entire derivative gain or loss is recorded in earnings as incurred.

     As of July 3, 2011 and January 2, 2011, the Company had accumulated net derivative gains of $61 thousand and $12 thousand, respectively, in other comprehensive income, all of which pertains to derivatives designated as cash flow hedging instruments that will be realized within 12 months and will also continue to experience fair value changes before affecting earnings. Based on notional amounts, as of July 3, 2011, the Company had dairy commodity futures contracts representing approximately two hundred nine thousand gallons. The Company’s cash flow derivative instruments contain credit-risk-related contingent features. At July 3, 2011, the Company, in the normal course of business, has not posted or received collateral related to these contingent features.

     The Company had no derivatives not designated as hedging instruments as of July 3, 2011 and January 2, 2011.

     The following table presents the effect of derivative instruments on the condensed consolidated financial statements for the thirteen weeks ended July 3, 2011 and July 4, 2010 (in thousands):

		Gain/(Loss)								Gain/(Loss)
		Recognized in OCI								Reclassified into Earnings
Contract Type		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
Cash flow commodity hedges		$	31			$	(5	)		$	61			$	(18	)

     The following table presents the effect of derivative instruments on the condensed consolidated financial statements for the twenty-six weeks ended July 3, 2011 and July 4, 2010 (in thousands):

		Gain/(Loss)								Gain/(Loss)
		Recognized in OCI								Reclassified into Earnings
Contract Type		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
Cash flow commodity hedges		$	118			$	(40	)		$	68			$	(35	)

5. Fair Value Measurements

     Generally Accepted Accounting Principles define fair value, establish a framework for measuring fair value, and establish a fair value hierarchy that prioritizes the inputs used to measure fair value:

	•		Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
	•		Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
	•		Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

     The following table presents the financial assets measured at fair value on a recurring basis as of July 3, 2011 (in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Cash		$	5,461			$	5,461			$	—			$	—
Money market funds		$	27,000			$	27,000			$	—			$	—
Derivatives		$	61			$	61			$	—			$	—

     The following table presents the financial assets measured at fair value on a recurring basis as of January 2, 2011 (in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Cash		$	5,303			$	5,303			$	—			$	—
Money market funds		$	17,789			$	17,789			$	—			$	—
Derivatives		$	12			$	12			$	—			$	—

     Cash and cash equivalents include cash held at FDIC-insured financial institutions and highly liquid money market funds. The fair value of money market funds is determined using quoted market prices in active markets for identical assets, thus they are considered to be Level 1 instruments.

     Derivative assets consist of commodity futures contracts. Where applicable, the Company uses quoted prices in an active market for identical derivative assets and liabilities that are traded in exchanges. These derivative assets are included in Level 1.

6. Inventories

Inventories consist of the following (in thousands):

		July 3,				January 2,
		2011				2011
Coffee		$	16,042			$	18,880
Merchandise held for sale			4,073				4,015
Supplies			3,043				3,036
		$	23,158			$	25,931

     At July 3, 2011 and January 2, 2011, the Company had fixed price inventory purchase commitments, primarily for green coffee, aggregating approximately $46.3 million and $26.9 million, respectively. These commitments are for less than one year.

7. Equity and Stock Based Compensation

     The Company maintains stock compensation plans, which provide for the granting of non-qualified stock options and restricted stock to officers and key employees and certain non-employees. Stock options have been granted at prices equal to the fair market values as of the dates of grant. Options and restricted stock generally vest over four years and options generally expire ten years from the grant date. Upon exercise of an option, new shares of stock are issued by the Company. Stock-based compensation expense for the thirteen weeks ended July 3, 2011 and July 4, 2010 was approximately $0.5 million and $0.4 million, respectively and is included in general and administrative expenses in the condensed consolidated statements of operations. Stock-based compensation expense for the twenty-six weeks ended July 3, 2011 and July 4, 2010 was approximately $0.9 million and $0.6 million, respectively.

Stock option activity during the period indicated is as follows (in thousands, except per share and life data):

										Weighted
						Weighted				Average
		Number of				Average				Contract
		Shares				Exercise Price				Life
Outstanding, January 2, 2011			1,466			$	3.77			6.88 Yrs
Granted			—			$	—
Exercised			(57	)		$	2.61
Forfeited			(8	)		$	4.84
Outstanding, April 3, 2011			1,401			$	3.81			6.60 Yrs
Granted			—			$	—
Exercised			(232	)		$	3.56
Forfeited			(7	)		$	5.30
Outstanding, July 3, 2011			1,162			$	3.85			6.30 Yrs
Options vested at July 3, 2011			643			$	5.13			5.61 Yrs

     Restricted Stock activity during the period indicated is as follows (in thousands, except per share and life data):

						Weighted				Weighted
						Average Grant				Average
		Number of				Date				Contract
		Shares				Fair Value				Life
Outstanding, January 2, 2011			405			$	6.43
Granted			310			$	9.14
Vested			(82	)		$	7.07
Forfeited			(2	)		$	7.52
Outstanding, April 3, 2011			631			$	7.68			3.25 Yrs
Granted			—			$	—
Vested			(3	)		$	1.86
Forfeited			(4	)		$	7.47
Outstanding, July 3, 2011			624			$	7.71			3.05 Yrs

8. Income Taxes

     A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria. During the first quarter of 2011, we determined that a full valuation allowance against our deferred tax assets was not necessary and recorded a partial reversal of the deferred tax valuation allowance of $21.4 million. We considered the available positive and negative evidence, including our recent earnings trend and expected continued future taxable income including the following discrete events: (1) our attainment of three years of cumulative income and (2) the finalization of our current year and long range financial plan which projects sufficient future taxable income. As of July 3, 2011, we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets.

     Our effective income tax rate differs from the statutory income tax rate primarily as a result of the reduction of a portion of our valuation allowance described above, our use of federal net operating losses (NOLs) to offset current federal tax expense and our use of tax credits to offset current state tax expense.

9. Net Income Per Share

     Basic and diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share for the thirteen week and twenty-six periods ended July 3, 2011 and July 4, 2010, were as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 3,				July 4,				July 3				July 4,
		2011				2010				2011				2010
Net income attributable to Caribou Coffee Company, Inc.		$	4,425			$	2,421			$	28,496			$	3,459
Weighted average common shares outstanding — basic			19,995				19,515				19,925				19,514
Dilutive impact of stock-based compensation			685				1,005				680				867
Weighted average common shares outstanding — dilutive			20,670				20,520				20,605				20,381
Basic net income per share		$	0.22			$	0.12			$	1.43			$	0.18
Diluted net income per share		$	0.21			$	0.12			$	1.38			$	0.17

     For thirteen week periods ended July 3, 2011 and July 4, 2010, less than 0.1 million and 0.2 million equity awards, respectively, and for the twenty-six periods ended July 3, 2011and July 4, 2010, 0.1 million and 0.4 million equity awards, respectively were excluded from the calculation of shares applicable to diluted net income per share because their inclusion would have been anti-dilutive.

10. Master Franchise Agreement

     In November 2004, the Company entered into a Master Franchise Agreement with a franchisee. The agreement provides the franchisee the right to develop, subfranchise or operate 250 Caribou Coffee coffeehouses in 12 Middle Eastern countries. In June of 2011, the Master Franchise Agreement was amended to expand the rights of the franchisee to develop 350 Caribou Coffee coffeehouses and to extend the expiration date. The Agreement, as amended, expires in December 2021.

     In connection with the original agreement, the franchisee paid the Company a nonrefundable deposit aggregating $3.3 million. In addition to the deposit, under the amended agreement the franchisee continues to be obligated to pay the Company $20 thousand per franchised/subfranchised coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee Coffeehouses and $15 thousand for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5 thousand of the initial deposit received by the Company to be applied against the initial franchise fee as discussed herein. Monthly royalty payments ranging from 3%-5% of gross sales are also due to the Company.

     As of July 3, 2011 and January 2, 2011, the Company included $1.9 million of the deposit in long term liabilities as deferred revenue. As of July 3, 2011 and January 2, 2011, the Company included $0.4 million and $0.3 million in current liabilities as deferred revenue on its balance sheet, respectively. The initial deposit will be amortized into income on a pro rata basis along with the initial franchise fee payments received in connection with the execution of the franchise or subfranchise agreements at the time of the coffeehouse opening. The current portion of deferred revenue represents the franchise fees for the coffeehouses estimated to be opened during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At July 3, 2011, there were 74 coffeehouses operating under this Agreement.

11. Revolving Credit Facility

     On February 19, 2010, the Company entered into a sale leaseback arrangement with a third party finance company whereby from time to time the Company sells equipment to the finance company, and, immediately following the sale, it leases back all of the equipment it sold to such third party. The Company does not recognize any gain or loss on the sale of the assets. The maximum amount of equipment the Company can sell and leaseback is $15.0 million, with an option for an additional $10.0 million. The agreement expires on December 31, 2011. Annual rent payable under the lease arrangement is equal to the amount outstanding under the lease financing arrangement multiplied by the applicable Federal Funds effective rate plus a specified margin or the lenders prime rate plus a specified margin.

     The finance company funds its obligations under the lease financing arrangement through a revolving credit facility that it entered into with a commercial lender also on February 19, 2010. The terms of the revolving credit facility are economically equivalent to the lease financing arrangement such that the amount of rent payments and unpaid acquisition costs under the lease financing arrangement are at all times equal to the interest and principal under the revolving credit facility. The Company consolidates the third party finance company as the Company is the primary beneficiary in a variable interest entity due to the terms and provisions of the lease financing arrangement. Accordingly, the Company’s condensed consolidated balance sheets include all assets and liabilities of the third party finance company under the captions property and equipment and revolving credit facility, respectively. The Company’s condensed consolidated statements of operations include all the operations of the finance company including all interest expense related to the revolving credit facility. Notwithstanding this presentation, the Company’s obligations are limited to its obligations under the lease financing arrangement and the Company has no obligations under the revolving credit facility. The third party finance company was established solely for the purpose of facilitating the Company’s sale leaseback arrangement. The finance company does not have any other assets or liabilities or income and expense other than those associated with the revolving credit facility. At July 3, 2011 there was no property and equipment leased under this arrangement.

     Both the lease financing arrangement and the revolving credit facility above were entered into on February 19, 2010. Simultaneously, the Company terminated a similar lease financing arrangement and revolving credit facility with a different commercial lender. Upon termination of old lease financing arrangement and revolving credit facility, the Company wrote off $0.1 million in deferred financing fees and capitalized $0.3 million in deferred financing fees related to the new lease arrangement and revolving credit facility, which will be amortized over the life of the agreements.

     The terms of the sale leaseback agreement contain certain financial covenants and limitations on the amount used for expansion activities based on leverage ratios and interest coverage ratios of the Company. The Company is liable for 0.5% commitment fee on any unused portion of the facility. There are no amounts outstanding under the facility at July 3, 2011 or January 2, 2011.

     Unamortized deferred financing fees capitalized on the balance sheet totaled $0.1 million as of July 3, 2011 and January 2, 2011. Interest payable under the revolving credit facility is equal to the amount outstanding under the facility multiplied by the applicable LIBOR rate plus a specified margin.

12. Commitments and Contingencies

     From time to time, the Company becomes involved in certain legal proceedings in the ordinary course of business. The Company does not believe that any such ordinary course legal proceedings to which it is currently a party will have a material adverse effect on its financial position or results of operations.

13. Segment Reporting

     Segment information is prepared on the same basis that the Company’s management reviews financial information for decision making purposes. The Company has three reportable operating segments: retail coffeehouses, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. All of the segment sales are from external customers.

     Retail Coffeehouses

     The Company’s retail segment represented 74.8% and 83.8% of total net sales for the thirteen weeks ended July 3, 2011 and July 4, 2010, respectively and 77.1% and 83.4% of total net sales for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively. The retail segment operated 407 company-owned coffeehouses located in 16 states and the District of Columbia, as of July 3, 2011. The coffeehouses offer customers high-quality premium coffee and espresso-based beverages, food, and also offer specialty teas, whole bean coffee, branded merchandise and related products.

     Commercial

     The Company’s commercial segment represented 21.0% and 12.6% of total net sales for the thirteen weeks ended July 3, 2011 and July 4, 2010, respectively and 18.7% and 13.0% of total net sales for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively. The commercial segment sells high-quality premium whole and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues, on-line customers.

     Franchise

     The Company’s franchise segment represented 4.2% and 3.6% of total net sales for the thirteen weeks ended July 3, 2011 and July 4, 2010, respectively and 4.2% and 3.6% of total net sales for the twenty-six weeks ended July 3, 2011 and July 4, 2010, respectively. The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of July 3, 2011, there were 147 franchised coffeehouses in U.S and international markets.

     The tables below present information by operating segment for the thirteen and twenty-six weeks ended July 3, 2011 and July 4, 2010 (in thousands):

Thirteen weeks ended July 3, 2011

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	60,032			$	16,828			$	3,410			$	—			$	80,270
Costs of sales and related occupancy costs			25,055				11,010				1,858				—				37,923
Operating expenses			25,089				1,443				279				—				26,811
Depreciation and amortization			2,733				31				4				—				2,768
General and administrative expenses			2,272				—				—				5,870				8,142
Operating income (loss)		$	4,883			$	4,344			$	1,269			$	(5,870	)			4,626
Identifiable assets		$	29,157			$	309			$	42			$	8,282			$	37,790
Capital expenditures		$	1,010			$	55			$	—			$	1,269			$	2,334

Thirteen weeks ended July 4, 2010

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	57,751			$	8,660			$	2,474			$	—			$	68,885
Costs of sales and related occupancy costs			23,475				5,668				1,408				—				30,551
Operating expenses			23,598				1,104				365				—				25,067
Depreciation and amortization			3,010				14				4				—				3,028
General and administrative expenses			2,122				—				—				5,511				7,633
Operating (loss) income		$	5,546			$	1,874			$	697			$	(5,511	)			2,606
Identifiable assets		$	33,392			$	233			$	57			$	7,667			$	41,349
Capital expenditures		$	199			$	73			$	—			$	328			$	600

Twenty-six weeks ended July 3, 2011

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	117,643			$	28,485			$	6,417			$	—			$	152,545
Costs of sales and related occupancy costs			49,198				18,323				3,638				—				71,159
Operating expenses			49,070				2,743				408				—				52,221
Depreciation and amortization			5,636				60				8				—				5,704
General and administrative expenses			4,529				—				—				11,411				15,940
Operating income (loss)		$	9,210			$	7,359			$	2,363			$	(11,411	)			7,521
Identifiable assets		$	29,157			$	309			$	42			$	8,282			$	37,790
Capital expenditures		$	1,506			$	119			$	—			$	1,800			$	3,425

Twenty-six weeks ended July 4, 2010

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	113,348			$	17,647			$	4,940			$	—			$	135,935
Costs of sales and related occupancy costs			47,050				11,962				2,938				—				61,950
Operating expenses			47,279				2,083				667				—				50,029
Depreciation and amortization			6,139				26				7				—				6,172
General and administrative expenses			3,969				—				—				10,173				14,142
Operating (loss) income		$	8,911			$	3,576			$	1,328			$	(10,173	)			3,642
Identifiable assets		$	33,392			$	233			$	57			$	7,667			$	41,349
Capital expenditures		$	775			$	73			$	57			$	521			$	1,426

     All of the Company’s assets are located in the United States, and approximately 2.1% of the Company’s consolidated sales come from outside the United States.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The information in this Management’s Discussion and Analysis section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended January 2, 2011 contained in the our Form 10-K (File No. [000-51535]).

FORWARD-LOOKING STATEMENTS

     Certain statements in this report and other written or oral statements made by or on behalf of Caribou Coffee are “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Caribou Coffee brand and other factors disclosed in the our filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

     Founded in 1992, we are one of the leading branded coffee companies in the United States, with a compelling multi-channel approach to our customers. Based on number of coffeehouses, we are the second largest company-operated premium coffeehouse operator in the United States. As of July 3, 2011, we had 554 retail locations, including 147 franchised locations. Our coffeehouses are located in 20 states, the District of Columbia and nine international markets. Our coffeehouses aspire to be the community place loved by our guests who are provided with an extraordinary experience that makes their day better. Our coffeehouses offer customers high-quality premium coffee and espresso-based beverages, foods and coffee lifestyle items. We believe we create a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service. Our success in the retail channel has elevated the Caribou Coffee brand and created demand across other channels, including various commercial and foodservice categories. We sell our high-quality whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers nationwide. We seek to continue to grow our brand internationally through franchise agreements and we expect to selectively enter into franchising partnerships domestically. Through our multi-channel approach, we believe we offer a total coffee solution platform to our customers.

     Our comparable coffeehouse sales have significantly improved driven by the expansion of our food product offerings such as hot oatmeal and breakfast sandwiches. We have reported positive comparable coffeehouse sales over the previous seven quarters, including 4.6% for the quarter ending July 3, 2011. Our commercial segment has also experienced accelerated growth and in the second thirteen weeks of 2011 represented 21% of total net sales, up from less than 5% in 2007. Caribou Coffee whole bean and ground coffee products are found in grocery, mass merchant and club stores in over 40 states, allowing us to expand our brand recognition through this segment and reach customers across the United States. We also sell our blended coffees and license our brand to Keurig, Inc., an industry leader in single-cup brewing technology, under an exclusive arrangement, for sale and use in its K-Cup single serve line of business. Caribou K-cups represent an important and growing portion of our commercial business. This enables Caribou Coffee products to be available in all 50 states. Our franchise segment franchises our brand to partners to operate Caribou Coffee branded coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations.

Critical Accounting Policies

     The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended January 2, 2011, (File No. 000-51535) includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial condition

and results of operations. We believe those critical accounting policies are significant or involve additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts.

Fiscal Periods

     Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Each fiscal quarter reported herein will consist of two four-week months and one five-week month.

     Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended July 3, 2011 are not necessarily indicative of future results that may be expected for the year ending January 1, 2012.

Thirteen Weeks Ended July 3, 2011 vs. Thirteen Weeks Ended July 4, 2010

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations:

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	60,032			$	57,751				3.9	%			74.8	%			83.8	%
Commercial and franchise			20,238				11,134				81.8	%			25.2	%			16.2	%
Total net sales			80,270				68,885				16.5	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			37,923				30,551				24.1	%			47.2	%			44.4	%
Operating expenses			26,811				25,067				7.0	%			33.4	%			36.4	%
Depreciation and amortization			2,768				3,028				(8.6	)%			3.4	%			4.4	%
General and administrative expenses			8,142				7,633				6.7	%			10.1	%			11.1	%
Operating income			4,626				2,606				77.6	%			5.8	%			3.8	%
Other income (expense):
Interest income			7				5				40.0	%			—	%			—	%
Interest expense			(58	)			(64	)			(9.4	)%			0.1	%			0.1	%
Income before benefit from income taxes and noncontrolling interest			4,575				2,547				79.6	%			5.7	%			3.7	%
Provision for income taxes			47				20				135.0	%			0.1	%			0.0	%
Net income			4,528				2,527				79.2	%			5.6	%			3.7	%
Less: Net income attributable to noncontrolling interest			103				106				(2.8	)%			0.1	%			0.2	%
Net income attributable to Caribou Coffee Company, Inc.		$	4,425			$	2,421				82.8	%			5.5	%			3.5	%

Net Sales

     Net sales increased $11.4 million, or 16.5%, to $80.3 million in the second thirteen weeks of 2011 from $68.9 million in the second thirteen weeks of 2010. Each of our business segments contributed significantly to our consolidated revenue growth. Coffeehouse net sales increased $2.3 million, or 3.9%, to $60.0 million in the second thirteen weeks of 2011 from $57.7 million in the second thirteen weeks of 2010. Commercial and franchise sales increased by $9.1 million, or 81.8%, to $20.2 million for the second thirteen weeks of 2011 from $11.1 million for the second thirteen weeks of 2010. Commercial segment sales grew by $8.2 million or 94.3%, based on increased sales to new and existing customers. Franchise sales grew by $0.9 million or 37.9% primarily due to new franchise and license locations.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $7.4 million, or 24.1%, to $37.9 million in the second thirteen weeks of 2011, from $30.5 million in the second thirteen weeks of 2010, primarily due to higher sales. On a dollar basis, this growth was attributable to increased volume across each of our operating segments. As a percentage of total net sales, cost of sales and related occupancy costs increased to 47.2% in the second thirteen weeks of 2011 from 44.4% in the second thirteen weeks of 2010. This increase as a percentage of sales was due to higher coffee commodity costs on a year over year basis and an overall mix change with a higher percentage of sales coming from our commercial and franchise segments, which have higher cost of sales as a percentage of sales.

     Operating expenses. Operating expenses increased $1.7 million, or 7.0%, to $26.8 million in the second thirteen weeks of fiscal 2011, from $25.1 million in the second thirteen weeks of 2010. On a dollar basis, this increase was primarily driven by an increase in variable expenses such as labor related to our increase in sales volume. Operating expenses as a percentage of total net sales decreased to 33.4% in the second thirteen weeks of 2011 from 36.4% in the second thirteen weeks of 2010 as we were able to gain leverage within our business channels and benefitted from a shift in our overall sales mix to their commercial channel and lower marketing spend.

     Depreciation and amortization. Depreciation and amortization decreased $0.2 million, or 8.6%, to $2.8 million in the second thirteen weeks of 2011, from $3.0 million in the second thirteen weeks of 2010. This decrease is due to a lower depreciable asset base from reduced capital spending in fiscal years 2010 and 2009.

     General and administrative expenses. General and administrative expenses increased $0.5 million, or 6.7%, to $8.1 million in the second thirteen weeks of 2011, from $7.6 million in the second thirteen weeks of 2010. As a percentage of total net sales, general and administrative expenses was 10.1% in the second thirteen weeks of 2011, compared to 11.1% in the second thirteen weeks of 2010 as we were able to leverage fixed costs against higher sales.

     Interest expense. Interest expense remained relatively flat at $0.1 million for both the second thirteen weeks of 2011 and 2010. We had no outstanding borrowings during the second thirteen weeks of 2011 or 2010.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the second thirteen weeks of fiscal 2011 and 2010.

Retail Coffeehouses

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales		$	60,032			$	57,751				3.9	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			25,055				23,475				6.7	%			41.7	%			40.6	%
Operating expenses			25,089				23,598				6.3	%			41.8	%			40.9	%
Depreciation and amortization			2,733				3,010				(9.2	)%			4.6	%			5.2	%
General and administrative expenses			2,272				2,122				7.1	%			3.8	%			3.7	%
Operating income		$	4,883			$	5,546				(12.0	)%			8.1	%			9.6	%

     The retail segment operates company-owned coffeehouses. As of July 3, 2011, there were 407 company-owned coffeehouses in 16 states and the District of Columbia.

Sales

     Coffeehouse sales increased $2.2 million, or 3.9%, to $60.0 million in the second thirteen weeks of 2011 from $57.8 million in the second thirteen weeks of 2010. This increase is attributable to a 4.6% increase in comparable coffeehouse sales in the second thirteen weeks of 2011 as compared to the same period in 2010. The increase in comparable coffeehouse sales was primarily driven by a higher average guest check, due to higher food sales, attributable to the launch of warm breakfast sandwiches in our coffeehouses.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.6 million, or 6.7%, to $25.1 million in the second thirteen weeks of 2011, from $23.5 million for the second thirteen weeks of 2010. The increase in total dollars was driven primarily by increased cost of goods related to our 4.6% growth in comparable coffeehouse sales. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales increased to 41.7% for the second thirteen weeks of 2011 from 40.6% for the second thirteen weeks of 2010 due to the impact of higher coffee commodity costs on our cost of sales.

     Operating expenses. Operating expenses increased $1.5 million, or 6.3%, to $25.1 million for the second thirteen weeks of 2011, from $23.6 million for the second thirteen weeks of 2010. On a dollar basis, this increase was due to an increase in variable expenses, such as supplies and credit card fees related to our 4.6% increase in comparable coffeehouses sales, when compared to the prior year. As a percentage of coffeehouse net sales, operating expenses increased to 41.8% in the second thirteen weeks of 2011 from 40.9% in the second thirteen weeks of 2010, due to the timing of various marketing investments in the thirteen week period.

     Depreciation and amortization. Depreciation and amortization decreased $0.3 million, or 9.2%, to $2.7 million for the second thirteen weeks of 2011, from $3.0 million for the second thirteen weeks of 2010. Depreciation and amortization was lower in the quarter due to a lower depreciable asset base.

     General and administrative expenses. General and administrative expenses increased $0.2 million, or 7.1%, to $2.3 million for the second thirteen weeks of 2011 from $2.1 million for the second thirteen weeks of 2010. This increase was due to resources added in the latter half of 2010 to support of key initiatives, including marketing, product management and real estate.

Commercial

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of commercial sales
Sales		$	16,828			$	8,660				94.3	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			11,010				5,668				94.2	%			65.4	%			65.5	%
Operating expenses			1,443				1,104				30.7	%			8.6	%			12.7	%
Depreciation and amortization			31				14				121.4	%			0.2	%			0.2	%
Operating income		$	4,344			$	1,874				131.8	%			25.8	%			21.6	%

     The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers. In addition, we sell our blended coffees and license our brand to Keurig, under an exclusive arrangement, for sale and use in its K-Cup single serve line of business. Keurig, an industry leader in single cup brewing technology, facilitates the sale and distribution of Caribou K-Cups, which represent an important and growing portion of our commercial business. As of July 3, 2011, Caribou Coffee can be found in over 40 states and in 9,000 stores through our Caribou-managed sales channel. Caribou Coffee K-Cups are found in, we believe, an additional 17,000 stores across all 50 states.

Sales

     Sales increased $8.2 million, or 94.3%, to $16.8 million in the second thirteen weeks of 2011, from $8.7 million in the second thirteen weeks of 2010. This increase is primarily attributable to the incremental sales to new and existing office coffee and foodservice customers, as well as increased sales to Keurig.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $5.3 million, or 94.2%, to $11.0 million for the second thirteen weeks of 2011, from $5.7 million for the second thirteen weeks of 2010. On a dollar basis, this increase in cost of sales was primarily related to the 94.3% increase in sales volume in this segment. As a percentage of sales, cost of sales and related occupancy costs decreased to 65.4% for the second thirteen weeks of 2011, from 65.5% for the second thirteen weeks of 2010. This slight decrease in cost of sales and related occupancy costs as a percentage of sales was due to higher coffee commodity costs partially offset by selective price increases taken during the quarter to offset rising coffee costs that will continue to occur throughout the year. We expect the rising commodity costs will impact our weighted average coffee cost during the remainder of the year.

     Operating expenses. Operating expenses increased $0.3 million, or 30.7%, to $1.4 million for the second thirteen weeks of 2011, from $1.1 million for the second thirteen weeks of 2010. On a dollar basis, that increase is attributable to higher labor and other operating costs as we invest in our team and infrastructure to support our growing commercial segment. As a percentage of sales, operating expenses decreased to 8.6% in the second thirteen weeks of 2011 from 12.7% in the second thirteen weeks of 2010. The decrease is attributable to leveraging higher sales.

Franchise

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of franchise sales
Sales		$	3,410			$	2,474				37.9	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			1,858				1,408				32.0	%			54.5	%			56.9	%
Operating expenses			279				365				(23.6	)%			8.2	%			14.8	%
Depreciation and amortization			4				4				0.0	%			0.1	%			0.2	%
Operating income		$	1,269			$	697				82.3	%			37.2	%			28.2	%

     The franchise segment franchises our brand to partners to operate Caribou Coffee branded kiosks and coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations. As of July 3, 2011, there were 147 franchised coffeehouses in the U.S and international markets.

Sales

     Sales increased $0.9 million, or 37.9%, to $3.4 million in the second thirteen weeks of 2011, from $2.5 million in the second thirteen weeks of 2010 primarily due to higher royalties and product sales to our franchisees. As of the end of the second 13 weeks of 2011 we have 22 more franchise locations than we had as of the end of the second 13 weeks of 2010.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.5 million, or 32.0%, to $1.9 million for the second thirteen weeks of 2011, from $1.4 million for the second thirteen weeks of 2010 due primarily to our increase in product sales to our franchise partners. As a percentage of sales, cost of sales

and related occupancy costs decreased to 54.5% for the second thirteen weeks of 2011, from 56.9% for the second thirteen weeks of 2010. This decrease in cost of sales and related occupancy costs as a percentage of sales was due to selective price increases taken during the current year to offset our expected rising coffee costs that will occur throughout the year as the rising commodity costs will impact our weighted average coffee cost.

     Operating expenses. Operating expenses decreased $0.1 million, or 23.6%, to $0.3 million in the second thirteen weeks of 2011, from $0.4 million in the second thirteen weeks of 2010. As a percentage of sales, operating expenses decreased to 8.2% in the second thirteen weeks of 2011 from 14.8% in the second thirteen weeks of 2010 due to leveraging higher sales.

Unallocated Corporate

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of total net sales
General and administrative expenses			5,870				5,511				6.5	%			7.3	%			8.0	%
Operating loss		$	(5,870	)		$	(5,511	)			6.5	%			7.3	%			8.0	%

     General and administrative expenses. General and administrative expenses increased $0.4 million, or 6.5%, to $5.9 million for the second thirteen weeks of 2011 from $5.5 million for the second thirteen weeks of 2010. On a dollar basis, this increase was due to resources added in the latter half of 2010 to support key initiatives, including marketing, product management and real estate. As a percentage of total net sales, general and administrative expenses decreased to 7.3% in the second thirteen weeks of 2011, from 8.0% in the second thirteen weeks of 2010, due to leveraging higher sales.

Twenty-Six Weeks Ended July 3, 2011 vs. Twenty-Six Weeks Ended July 4, 2010

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations:

		Twenty-Six Weeks Ended												Twenty-Six Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	117,643			$	113,348				3.8	%			77.1	%			83.4	%
Commercial and franchise			34,902				22,587				54.5	%			22.9	%			16.6	%
Total net sales			152,545				135,935				12.2	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			71,159				61,950				14.9	%			46.6	%			45.6	%
Operating expenses			52,221				50,029				4.4	%			34.2	%			36.8	%
Depreciation and amortization			5,704				6,172				(7.6	)%			3.7	%			4.5	%
General and administrative expenses			15,940				14,142				12.7	%			10.4	%			10.4	%
Operating income			7,521				3,642				106.6	%			4.9	%			2.7	%
Other income (expense):
Interest income			12				10				20.0	%			—	%			—	%
Interest expense			(114	)			(171	)			(33.3	)%			(0.1	)%			(0.1	)%
Income before benefit from income taxes and noncontrolling interest			7,419				3,481				113.1	%			4.9	%			2.6	%
Benefit from income taxes			21,287				138				15,325.4	%			14.0	%			0.1	%
Net income			28,706				3,619				693.2	%			18.8	%			2.7	%
Less: Net income attributable to noncontrolling interest			210				160				31.3	%			0.1	%			0.1	%
Net income attributable to Caribou Coffee Company, Inc.		$	28,496			$	3,459				723.8	%			18.7	%			2.5	%

Net Sales

     Net sales increased $16.6 million, or 12.2%, to $152.5 million in the first twenty-six weeks of 2011 from $135.9 million in the first twenty-six weeks of 2010. Each of our business segments contributed significantly to our consolidated revenue growth. Coffeehouse net sales increased $4.3 million, or 3.8%, to $117.6 million in the first twenty-six weeks of 2011 from $113.3 million in the first twenty-six weeks of 2010. Commercial and franchise sales increased by $12.3 million, or 54.5%, to $34.9 million for the first twenty-six weeks of 2011 from $22.6 million for the first twenty-six weeks of 2010. Commercial segment sales grew by $10.8 million or 61.4%, based on increased sales to new and existing customers. Franchise sales grew by $1.5 million or 29.9% primarily due to new franchise and license locations.

Costs and Expenses

     Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $9.2 million, or 14.9%, to $71.2 million in the first twenty-six weeks of 2011, from $62.0 million in the first twenty-six weeks of 2010, primarily due to higher sales. On a dollar basis, this growth was attributable to increased volume across each of our operating segments. As a percentage of total net sales, cost of sales and related occupancy costs increased to 46.6% in the first twenty-six weeks of 2011 from 45.6% in the first twenty-six weeks of 2010. The increase as a percentage of sales was largely due higher coffee commodity costs on a year over year basis and an overall mix change with a higher percentage of sales coming from our commercial and franchise segments, which have higher cost of sales as a percentage of sales.

     Operating expenses. Operating expenses increased $2.2 million, or 4.4%, to $52.2 million in the first twenty-six weeks of fiscal 2011, from $50.0 million in the first twenty-six weeks of 2010. On a dollar basis, this increase was primarily driven by an increase in variable expenses related to our increase in sales volume. Operating expenses as a percentage of total net sales decreased to 34.2% in the first twenty-six weeks of 2011 from 36.8% in the first twenty-six weeks of 2010 as we were able to gain leverage on these categories from our increase in sales and lower marketing spend.

     Depreciation and amortization. Depreciation and amortization decreased $0.5 million, or 7.6%, to $5.7 million in the first twenty-six weeks of 2011, from $6.2 million in the first twenty-six weeks of 2010. This decrease is due to a lower depreciable asset base from reduced capital spending in fiscal years 2010 and 2009.

     General and administrative expenses. General and administrative expenses increased $1.8 million, or 12.7%, to $15.9 million in the first twenty-six weeks of 2011, from $14.1 million in the first twenty-six weeks of 2010. On a dollar basis, this increase is due to resources added in the latter half of 2010 to support key initiatives, including marketing, product management and real estate. As a percentage of total net sales, general and administrative expenses remained flat at 10.4% in the first twenty-six weeks of 2011 and 2010

     Interest expense. Interest expense decreased $0.1 million, or 32.9%, to $0.1 million in the first twenty-six weeks of 2011, from $0.2 million in the first twenty-six weeks of 2010. We had no outstanding borrowings during the first twenty-six weeks of 2011 or 2010.

     Tax benefit. In the first twenty-six weeks of 2011, the Company recorded a tax benefit of $21.3 million compared to a tax benefit of $0.1 million in first twenty-six weeks of 2010. In the first twenty-six week period of 2011, our net income tax benefit consisted primarily of a reduction of a portion of our valuation allowance on our deferred tax assets as described further below. Our effective income tax rate differs from the statutory income tax rate primarily as a result of the reduction of a portion of our valuation allowance, our use of federal net operating losses (NOLs) to offset current federal tax expense and our use of tax credits to offset current state tax expense.

     A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria. During the first fiscal quarter of 2011, we determined that a full valuation allowance against our deferred tax assets was not necessary and recorded a partial reversal of the

deferred tax valuation allowance of $21.3 million. We considered the available positive and negative evidence, including our recent earnings trend and expected continued future taxable income including the following discrete events: (1) our attainment of three years of cumulative income and (2) the finalization of our current year and long range financial plan which projects sufficient future taxable income. As of July 3, 2011, we continued to maintain a valuation allowance for the remainder of our gross deferred tax assets.

Operating Segments

Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the first twenty-six weeks of fiscal 2011 and 2010.

Retail Coffeehouses

		Twenty-Six Weeks Ended												Twenty-Six Weeks Ended
		July 3,				July 4,				%				July 3,				July 4,
		2011				2010				Change				2011				2010
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales		$	117,643			$	113,348				3.8	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			49,198				47,050				4.6	%			41.8	%			41.5	%
Operating expenses			49,070				47,279				3.8	%			41.7	%			41.7	%
Depreciation and amortization			5,636				6,139				(8.2	)%			4.8	%			5.4	%
General and administrative expenses			4,529				3,969				14.1	%			3.8	%			3.5	%
Operating income		$	9,210			$	8,911				3.4	%			7.8	%			7.9	%