PEETS COFFEE & TEA INC - FORM 10-Q

Attached files

file	filename
EXCEL - IDEA: XBRL DOCUMENT - PEETS COFFEE & TEA INC	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - PEETS COFFEE & TEA INC	v239161_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - PEETS COFFEE & TEA INC	v239161_ex31-1.htm
EX-32.2 - EXHIBIT 32.2 - PEETS COFFEE & TEA INC	v239161_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - PEETS COFFEE & TEA INC	v239161_ex31-2.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 2, 2011

¨ 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 ¨.

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 x No ¨

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 ¨	Accelerated Filer x
Non-Accelerated Filer ¨	Smaller reporting company ¨

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

As of November 6, 2011, 12,927,627 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	12
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	21
Item 2.	Unregistered Sales of Equity Securities and use of Proceeds	21

Item 6.	Exhibits	22
	Signatures	23

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands, except share amounts)

	October 2,		January 2,
	2011		2011

ASSETS

Current assets
Cash and cash equivalents	$	5,890	$	44,629
Short-term marketable securities		5,957		4,183
Accounts receivable, net		17,465		14,852
Inventories		60,486		33,534
Deferred income taxes - current		3,949		4,420
Prepaid expenses and other		12,629		7,798
Total current assets		106,376		109,416

Property, plant and equipment, net		90,919		97,279
Other assets, net		1,331		2,137

Total assets	$	198,626	$	208,832

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and other accrued liabilities	$	13,628	$	9,138
Accrued compensation and benefits		7,686		11,555
Deferred revenue		5,778		7,102
Total current liabilities		27,092		27,795

Deferred income taxes - non current		596		46
Deferred lease credits		6,783		7,023
Other long-term liabilities		1,040		1,468
Total liabilities		35,511		36,332

Shareholders' equity
Common stock, no par value; authorized 50,000,000 shares; issued and outstanding: 12,903,000 and 13,063,000 shares		60,470		81,995
Accumulated other comprehensive income		2		2
Retained earnings		102,643		90,503

Total shareholders' equity		163,115		172,500

Total liabilities and shareholders' equity	$	198,626	$	208,832

See notes to condensed consolidated financial statements.

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 2,			October 3,			October 2,		October 3,
	2011			2010			2011		2010

Retail stores	$	52,283		$	49,791		$	157,723	$	150,422
Specialty sales		38,926			30,417			112,573		91,758
Net revenue		91,209			80,208			270,296		242,180

Cost of sales and related occupancy expenses		47,062			38,138			132,840		113,054
Operating expenses		28,554			26,526			84,583		81,301
Transaction related expenses		-			-			-		970
Litigation related expenses		3,181			(66	)		3,260		(49	)
General and administrative expenses		6,308			5,811			19,087		17,718
Depreciation and amortization expenses		3,865			3,947			11,665		11,844
Total costs and expenses from operations		88,970			74,356			251,435		224,838

Income from operations		2,239			5,852			18,861		17,342

Interest income (expense), net		(9	)		2			9		6

Income before income taxes		2,230			5,854			18,870		17,348

Income tax provision		714			2,091			6,730		6,279

Net income	$	1,516		$	3,763		$	12,140	$	11,069

Net income per share:
Basic	$	0.12		$	0.29		$	0.94	$	0.85
Diluted	$	0.11		$	0.28		$	0.91	$	0.81

Shares used in calculation of net income per share:
Basic		12,889			12,847			12,951		13,094
Diluted		13,278			13,425			13,357		13,706

See notes to condensed consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	Thirty-nine weeks ended
	October 2,			October 3,
	2011			2010

Cash flows from operating activities:
Net income	$	12,140		$	11,069
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		13,397			13,456
Amortization of interest purchased		287			-
Stock-based compensation		3,024			2,457
Excess tax benefit from exercise of stock options		(7,892	)		(1,579	)
Tax benefit from exercise of stock options		7,142			1,311
Loss on disposition of assets and asset impairment		709			110
Deferred income taxes		1,021			-
Changes in other assets and liabilities:
Accounts receivable, net		(2,613	)		1,541
Inventories		(26,952	)		(14,424	)
Prepaid expenses and other current assets		(4,831	)		(2,332	)
Other assets		(4	)		26
Accounts payable, accrued liabilities and deferred revenue		(741	)		(6,249	)
Deferred lease credits and other long-term liabilities		(668	)		389
Net cash (used)/provided by operating activities		(5,981	)		5,775

Cash flows from investing activities:
Purchases of property, plant and equipment		(7,696	)		(8,396	)
Proceeds from sales of property, plant and equipment		-			17
Changes in restricted investments		798			558
Proceeds from sales and maturities of marketable securities		6,323			-
Purchases of marketable securities		(8,384	)		-
Net cash used in investing activities		(8,959	)		(7,821	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		19,588			9,315
Purchase of common stock		(51,279	)		(28,231	)
Excess tax benefit from exercise of stock options		7,892			1,579
Net cash used in financing activities		(23,799	)		(17,337	)

Decrease in cash and cash equivalents		(38,739	)		(19,383	)
Cash and cash equivalents, beginning of period		44,629			47,934

Cash and cash equivalents, end of period	$	5,890		$	28,551

Non-cash investing activities:
Capital expenditures incurred, but not yet paid	$	450		$	641
Other cash flow information:
Cash paid for income taxes		3,042			5,402

See notes to condensed consolidated financial statements.

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 2, 2011 and for the thirteen and thirty-nine weeks ended October 2, 2011 and October 3, 2010 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 2, 2011 (the “2010 Form 10-K”).

The results of operations for the thirteen and thirty-nine weeks ended October 2, 2011 are not necessarily indicative of the results expected for the full year. Litigation related expenses have been presented separately from operating expense in the condensed consolidated statements of income for all periods presented to conform to current period presentation. These reclassifications did not have an impact on income from operations, income before income taxes, net income, operating or total cash flows, or the financial position for any period presented.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The ASU changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. The ASU also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant impact to the Company’s consolidated financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity. The ASU requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is to be applied retrospectively beginning after December 15, 2011. The Company believes the adoption of this ASU concerns presentation and disclosure only and will not have an impact on its consolidated financial position or results of operations.

Comprehensive Income

For the thirteen weeks ended October 2, 2011 and October 3, 2010, comprehensive income was $1,514,000 and $3,763,000, respectively. For the thirty-nine weeks ended October 2, 2011 and October 3, 2010, comprehensive income was $12,140,000 and $11,069,000, 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 160,210 and 226,027 have been excluded from diluted weighted average shares outstanding for the thirteen-week periods ended October 2, 2011 and October 3, 2010, respectively and 100,439 and 140,056 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):

	Thirteen weeks				Thirty-nine weeks
	October 2,		October 3,		October 2,		October 3,
	2011		2010		2011		2010

Basic weighted average shares outstanding		12,889		12,847		12,951		13,094
Incremental shares from assumed exercise of stock options and awards		389		578		406		612
Diluted weighted average shares outstanding		13,278		13,425		13,357		13,706

2. Fair Value Measurements

ASU 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. ASU 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.

Recurring Fair Value Measurements

In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company has the following assets that are adjusted to fair value on a recurring basis.

Marketable securities

The fair values of our investments in our marketable securities were determined using quoted market prices from daily exchange traded markets. The fair values of these instruments were based on the closing price as of the balance sheet date and were classified as Level 1. The Company’s marketable securities consist of equity securities and interest-bearing, U.S. government, agency, and municipal securities classified as follows (in thousands):

	October 2,		January 2,
	2011		2011
Short-term	$	5,957	$	4,183
Total	$	5,957	$	4,183

Unrealized gains or losses on marketable securities are recorded in accumulated other comprehensive income at each measurement date.

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. For the thirteen and thirty-nine-week periods ended October 2, 2011, the Company recorded a charge of $315,326 and $412,326, respectively related to the impairment of assets for two under-performing stores. The fair market value of these assets was determined using the income approach and Level 3 inputs, which required management to make estimates about future cash flows. Management estimates the amount and timing of future cash flows based on its experience and knowledge of the retail market in which each store operates and other factors. This impairment charge is included in operating expenses in the accompanying condensed consolidated statements of income.

The carrying value of cash and equivalents, restricted cash, receivables and accounts payable approximates fair value.

3. Inventories

The Company’s inventories consist of the following (in thousands):

	October 2,		January 2,
	2011		2011

Green coffee	$	48,207	$	23,200
Other inventory		12,279		10,334
Total	$	60,486	$	33,534

4. Stock Purchase Program

On September 2, 2010, the Board of Directors approved a stock purchase program providing for the purchase by the Company of up to one million shares of the Company’s common stock. During the thirty-nine weeks ended October 2, 2011, the Company purchased 805,451 shares of common stock, at an average price of $44.20, in accordance with this stock purchase program. There are no remaining shares available for purchase under this stock purchase program.

On May 27, 2011, the Board of Directors authorized the Company to purchase up to one million additional shares of the Company’s common stock. During the thirty-nine weeks ended October 2, 2011, the Company purchased 270,765 shares of common stock, at an average price of $56.99, in accordance with this stock purchase program. 729,235 shares remain available for purchase 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”). 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, RSUs, performance stock award, performance cash award, or other stock award.

On May 27, 2011, the Company’s shareholders approved an amendment to the 2010 Plan (as amended, the “Amended 2010 Plan”). The Amended 2010 Plan added an additional 750,000 shares to the number of shares of common stock authorized for issuance under the 2010 Plan and provides that the number of shares available for issuance under the Amended 2010 Plan shall be reduced by one share for each share of common stock subject to a stock option or stock appreciation right with a strike price of at least 100% of the fair market value of the underlying common stock on the grant date and by two shares for each share of common stock subject to any other type of award issued pursuant to the Amended 2010 Plan.

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 2, 2011		2,018,690		$	24.87		5.63	$	34,050
Granted		166,530			48.23
Canceled		(36,800	)		26.49
Exercised		(890,363	)		20.96
Outstanding at October 2, 2011		1,258,057		$	30.69		6.75	$	31,390
Vested or expected to vest, October 2, 2011		1,177,217		$	30.34		6.67	$	29,781
Exercisable at October 2, 2011		627,099		$	26.48		5.62	$	18,289

Restricted Stock Unit Awards

During the second quarter of 2010, the Company began granting RSUs under the 2010 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 2, 2011		24,901		$	37.14
Granted		25,010			47.31
Vested		(7,692	)		37.14
Canceled		(5,095	)		41.60
Outstanding at October 2, 2011		37,124		$	43.38

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. On May 27, 2011, the Board of Directors of the Company amended the ESPP to eliminate the automatic annual increases in the number of shares available for issuance under the ESPP.

During the thirty-nine-week period ended October 2, 2011, 23,485 shares of the Company’s common stock were purchased under the ESPP. At October 2, 2011, 1,423,725 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):

	Thirteen weeks ended				Thirty-nine weeks ended
	October 2,		October 3,		October 2,		October 3,
	2011		2010		2011		2010

Stock-based compensation expense	$	923	$	783	$	2,784	$	2,405
Employee Stock Purchase Plan expense		66		50		240		52
Total	$	989	$	833	$	3,024	$	2,457

Cost of sales and related occupancy expenses	$	145	$	104	$	559	$	411
Operating expenses		323		264		883		708
General and administrative expenses		521		465		1,582		1,338
Total	$	989	$	833	$	3,024	$	2,457

Tax benefit	$	397	$	339	$	1,214	$	1,000

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 2,			October 3,
	2011			2010
Expected term in years		5.3			5.8
Expected stock price volatility		36.1	%		36.6	%
Risk-free interest rate		2.1	%		2.3	%
Expected dividend yield		0.0	%		0.0	%

Estimated fair value per option granted	$	17.32		$	13.92
Estimated fair value per RSU awarded	$	47.31		$	37.14

6. Line of Credit

On December 21, 2010, the Company entered into a credit agreement with Wells Fargo Bank, National Association (the “Bank”). The credit agreement provides for a $50 million revolving line of credit, the proceeds of which may be used for general corporate purposes, including funding working capital, capital expenditures, share repurchases and other needs. The line of credit has a maturity date of December 1, 2013. This credit agreement replaced the Company’s agreement with the Bank that matured on December 1, 2010 and under which there were no borrowings.

The Company’s obligations under the line of credit are unconditionally guaranteed by Peet’s Operating Company, Inc. in the principal amount up to $50 million. The line of credit has a maturity date of December 1, 2013.

During the thirteen and thirty-nine weeks ended October 2, 2011 and as of October 2, 2011, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $50.0 million as of October 2, 2011.

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 February 23, 2010, a complaint was filed in Orange County Superior Court by two former employees, on behalf of themselves and all other non-exempt employees similarly situated in the state of California naming the Company as a defendant. One of the plaintiffs was removed by an amended complaint and the remaining plaintiff 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 and seeks injunctive relief, restitution, monetary damages, penalties under the California Labor Code Private Attorneys General Act, costs and attorneys’ fees, penalties, and prejudgment interest. On September 14, 2011, the Company reached a tentative settlement pursuant to which we deny any liability but agree to maximum payment of $2,875,000, including plaintiff’s attorney’s fees. The parties are scheduled to appear before the California Superior Court on December 19, 2011 to seek the Court’s preliminary approval of the settlement terms. These costs, in addition to the Company’s attorney’s fees, are shown separately as litigation related expenses in the accompanying consolidated statements of income.

On February 2, 2010, the Council for Education and Research on Toxics (“CERT”), a public interest group, issued a series of pre-litigation notices of intent to sue a number of companies, including the Company, which sell “ready to drink” coffee in California for allegedly failing to issue clear and reasonable warnings with regard to potential exposures to acrylamide in accordance with California Health and Safety Code section 25249.6 (“Proposition 65”). The Company was among a number of companies named in an action filed in California Superior Court, Los Angeles County, on August 7, 2010. On December 14, 2010, CERT served a new 60-day notice letter to the Company and other companies alleging additional violations of Proposition 65 arising from potential acrylamide exposures from coffee sold at retail and brewed and consumed elsewhere. The Company was among a number of companies named in an action filed in California Superior Court, Los Angeles County, on May 9, 2011. The Company intends to vigorously defend against these claims. As these matters are at a very early stage, at this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.

On May 17, 2011, Aegis Retail Group, LLC and various affiliates filed a lawsuit against the Company claiming that we breached an alleged agreement to permit Aegis to open licensed Peet's Coffee & Tea locations and participate in our “We Proudly Brew” program in the New York metropolitan area. The Company is vigorously defending against this claim. As this matter is at a very early stage, at this time, the Company is 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 have arisen 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.

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, and 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 2, 2011
Net revenue	$	52,283			100.0	%	$	38,926		100.0	%				$	91,209			100.0	%
Cost of sales and occupancy		24,207			46.3	%		22,854		58.7	%					47,061			51.6	%
Operating expenses		20,630			39.5	%		7,924		20.4	%					28,554			31.3	%
Litigation related expenses		3,181			6.1	%										3,181			3.5	%
Depreciation and amortization		2,714			5.2	%		412		1.1	%	$	739			3,865			4.2	%
Segment operating income		1,551			3.0	%		7,736		19.9	%		(7,048	)		2,239			2.5	%
Total assets		47,387						22,447					128,792			198,626
Capital expenditures		1,986						160					700			2,845

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	%
Litigation related expenses		(66	)		-0.1	%										(66	)		-0.1	%
Depreciation and amortization		2,825			5.7	%		426		1.4	%	$	696			3,947			4.9	%
Segment operating income		4,493			9.0	%		7,866		25.9	%		(6,507	)		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 thirty-nine weeks ended October 2, 2011
Net revenue	$	157,723			100.0	%	$	112,573		100.0	%				$	270,296			100.0	%
Cost of sales and occupancy		70,143			44.5	%		62,697		55.7	%					132,840			49.1	%
Operating expenses		61,497			39.0	%		23,086		20.5	%					84,583			31.3	%
Litigation related expenses		3,260			2.1	%										3,260			1.2	%
Depreciation and amortization		8,182			5.2	%		1,289		1.1	%	$	2,194			11,665			4.3	%
Segment operating income		14,641			9.3	%		25,501		22.7	%		(21,281	)		18,861			7.0	%
Total assets		47,387						22,447					128,792			198,626
Capital expenditures		4,955						1,045					1,697			7,696

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	%
Litigation related expenses		(49	)		0.0	%										(49	)		0.0	%
Depreciation and amortization		8,441			5.6	%		1,315		1.4	%	$	2,088			11,844			4.9	%
Segment operating income		14,392			9.6	%		23,726		25.9	%		(20,776	)		17,342			7.2	%
Total assets		58,866						18,522					117,919			195,307
Capital expenditures		4,818						714					2,864			8,396

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

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. Forward-looking statements reflect our current views with respect to future events and 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. 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:

Coffee costs have increased significantly over the past year and increases in the cost of high-quality Arabica coffee beans could impact the profitability of our business. As discussed under “Company Overview and Industry Outlook” below and in the revised risk factor set forth in Part II, Item 1A of this Form 10-Q, we have experienced a dramatic rise in green coffee costs since June of 2010, which could adversely impact our margins and profitability.

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. Because our business is based primarily in California, a worsening of economic conditions, a decrease in consumer spending or a change in the competitive conditions in this market may substantially decrease our revenue and may adversely impact our ability to implement our business strategy. We expect that our California operations will continue to generate a substantial portion of our revenue. In addition, our California retail stores provide us with means for increasing brand awareness, building customer loyalty and creating a premium specialty coffee brand. As a result, if the current economic downturn and decrease in consumer spending in California continues or worsens, it may not only lead to a substantial decrease in revenue, but may also adversely impact our ability to market our brand, build customer loyalty, or otherwise implement our business strategy.

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 and our roastery is located directly on the bay in Alameda. The impact of a major earthquake or tsunami on our facilities, infrastructure and overall operations is difficult to predict and an earthquake or tsunami could seriously disrupt our entire business.

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, meal and rest periods, 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. In 2008, a lawsuit (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 February 23, 2010, a lawsuit (which the company has tentatively settled, and which settlement will be presented to the court for approval in December 2011) was filed by non-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 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 2010 Form 10-K titled “Risk Factors.”

Company Overview and Industry Outlook

Peet’s is a specialty coffee roaster and marketer of fresh, high-quality 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.

We expect the specialty coffee industry, fueled by continued consumer interest in high-quality coffee and related products, to continue to grow. We believe that growth opportunities exist in all of our distribution channels and that our specialty segment 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. In grocery, we expect to continue to expand into new markets in addition to the western U.S., eastern seaboard and other selected markets, although the full extent of our penetration will depend upon the growth of the specialty coffee category in those markets. We expect to continue to partner with distributors and companies to expand our presence in the foodservice and office environment.

Coffee cost is our second largest cost line item after personnel costs and in 2010 represented approximately 15% of our net revenue. In order to manage coffee costs we purchase and hold large quantities of inventory and use future fixed price purchase commitments. As of October 2, 2011, our inventory and fixed price commitments are sufficient for our remaining 2011 production and virtually all of our anticipated 2012 needs. Since the coffee we purchase comes from over 20 different countries and includes 28 different types of coffee (including 12 single origin coffees), these coffees are not necessarily interchangeable or substitutable and therefore the covered needs of specific origin coffees varies due to differing growing seasons and origin specific situations.

Given the concentration of coffee in our cost structure, if coffee costs do not decline and we are unable to pass along increased coffee costs to our customers through price increases, our margin and profitability may decrease. We expect to continue to monitor these markets and take actions we feel are appropriate to minimize the impact on us in the short and long-term.

Results of Operations

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 2,			October 3,			October 2,			October 3,
	2011			2010			2011			2010

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		51.6			47.5			49.1			46.7
Operating expenses		31.3			33.1			31.3			33.6
Transaction related expenses		-			-			-			0.4
Litigation related expenses		3.5			(0.1	)		1.2			-
General and administrative expenses		6.9			7.2			7.1			7.3
Depreciation and amortization expenses		4.2			4.9			4.3			4.9
Income from operations		2.5			7.3			7.0			7.2
Interest income, net		-			-			-			-
Income before income taxes		2.4			7.3			7.0			7.2
Income tax provision		0.8			2.6			2.5			2.6
Net income		1.7	%		4.7	%		4.5	%		4.6	%

Percent of net revenue by business segment:
Retail stores		57.3	%		62.1	%		58.4	%		62.1	%
Specialty sales		42.7			37.9			41.6			37.9

Percent of net revenue by business category:
Whole bean coffee and related products		57.2	%		54.3	%		57.0	%		54.6	%
Beverages and pastries		42.8			45.7			43.0			45.4

Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail stores		46.3	%		44.3	%		44.5	%		43.7	%
Specialty sales		58.7			52.8			55.7			51.6

Operating expenses as a percent of segment revenue:
Retail stores		39.5	%		41.1	%		39.0	%		41.2	%
Specialty sales		20.4			20.0			20.5			21.1

Percent increase from prior year:
Net Revenue		13.7	%		8.5	%		11.6	%		10.3	%
Retail stores		5.0			4.0			4.9			4.0
Specialty sales		28.0			16.8			22.7			22.5
Cost of sales and related occupancy expenses		23.4			11.2			17.5			13.3
Operating expenses		7.6			2.0			4.0			6.0
Transaction related expenses		-			(100.0	)		(100.0	)		659.6
Litigation related expenses		(4,949.4	)		(222.5	)		(6,806.7	)		(133.3	)
General and administrative expenses		8.6			(0.4	)		7.7			(0.6	)
Depreciation and amortization expenses		(2.1	)		(0.4	)		(1.5	)		5.8

Selected operating data:
Number of retail stores in operation
Beginning of the period		193			193			192			192
Store openings		1			1			2			2
Store closures		-			(1	)		-			(1	)
End of the period		194			193			194			193

Thirteen Weeks Ended October 2, 2011 Compared to Thirteen Weeks Ended October 3, 2010

Net revenue

Net revenue for the thirteen weeks ended October 2, 2011 increased $11.0 million, or 13.7%, compared to the corresponding period in 2010. Sales of whole bean and related products increased 19.6% to $52.1 million. Net revenue from beverages and pastries increased 6.7% to $39.1 million.

In the retail segment, net revenue increased $2.5 million, or 5.0%, compared to the corresponding period of 2010, driven by growth in both beverage and pastries sales and whole bean coffee and related sales. Sales of beverages and pastries in the retail segment increased by 6.7% to $39.1 million and sales of whole bean coffee and related products increased by 0.4% to $13.2 million. The beverage and pastries sales increase was due to price increases in the third quarter of 2010 and April 2011. Whole bean coffee sales slightly benefited from the price increases, partially offset by continuing cannibalization of bean sales in retail stores by sales of Peet’s coffee in grocery stores.

In the specialty sales segment, net revenue increased $8.5 million, or 28.0%, compared to the corresponding period of 2010, as summarized by business channel below. The growth in net revenue in grocery was due primarily to increased sales in existing markets and to a lesser extent to the addition of new grocery store accounts. 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 increased due to price increases in the fourth quarter of 2010, partially offset by lower volume due to cannibalization from our grocery business.

	Thirteen weeks ended
(dollars in thousands)	October 2, 2011		October 3, 2010		Increase
Grocery	$	24,972	$	18,117	$	6,855	37.8	%
Foodservice and office		10,193		8,648		1,545	17.9	%
Home delivery		3,761		3,652		109	3.0	%
Total specialty	$	38,926	$	30,417	$	8,509	28.0	%

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 47.5% in the third quarter of 2010 to 51.6% in the third quarter of 2011. The increase from last year was due primarily to higher coffee and to a lesser extent higher milk costs and a shift in revenue mix towards the specialty channel where we have lower gross margins than our retail business, partially offset by the impact of price increases and lower shipping expenses.

In the retail segment, cost of sales and related occupancy expenses as a percent of net revenue increased 2.0% as the impact of higher coffee costs and, to a lesser extent, milk costs were partially offset by the impact of price increases.

In the specialty segment, cost of sales and related occupancy expenses as a percent of net revenue increased 5.9% as the impact of higher coffee costs outweighed the impact of price increases and lower shipping expenses.

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 1.8% to 31.3% primarily due to the revenue mix shift from the retail segment towards the specialty segment, which has lower operating costs, and the impact of price increases.

In the retail segment, operating expenses as a percent of net revenue decreased 1.6% primarily due to lower payroll expenses in retail stores, the impact of price increases, and lower store repairs and maintenance, partially offset by impairment losses on underperforming stores.

In the specialty segment, operating expenses as a percent of net revenue increased 0.4% due primarily to higher legal expenses, partially offset by price increases.

Litigation related expenses

Litigation related expenses consist of $3.2 million related to the settlement of a wage and hour class action lawsuit that was filed in February 2010. For the corresponding period in 2010, there was a $66,000 net reduction in costs incurred related to finalizing the settlement of a previous wage and hour class action lawsuit.

General and administrative expenses

General and administrative expenses increased to $6.3 million compared to $5.7 million for the corresponding period last year primarily due to higher marketing costs.

Depreciation and amortization expense

Depreciation and amortization expense was consistent with the corresponding period last year.

Interest income, net

We invest in equity securities and interest-bearing, U.S. government, agency, and municipal securities. Interest income includes interest income and gains or losses from the sale of these instruments, net of interest expense. Interest expense was higher than interest income during the quarter due primarily to lower average investment balances.

Income tax provision

The effective income tax rate for the third quarter of 2011 is 32.0% compared to 35.7% during the third quarter of 2010 due primarily to the impact of the domestic production deduction on higher taxable income than our recorded income, as our litigation related expenses will be deductible when paid in 2012 rather than in 2011.

The Company does not expect unrecognized tax benefits to change materially within the next 12 months.

Thirty-nine Weeks Ended October 2, 2011 Compared to Thirty-nine Weeks Ended October 3, 2010

Net revenue

Net revenue for the thirty-nine weeks ended October 2, 2011 increased $28.1 million, or 11.6%, compared to the corresponding period in 2010. Sales of whole bean and related products increased 16.5% to $154.1 million. Net revenue from beverages and pastries increased 5.7% to $116.2 million.

In the retail segment, net revenue increased $7.3 million, or 4.9%, compared to the corresponding period in 2010, driven by growth in both beverage and pastries sales and whole bean coffee and related sales. Sales of beverages and pastries in the retail segment increased by 5.8% to $116.2 million, while sales of whole bean coffee and related products increased by 2.2% to $41.5 million. The beverage and pastries sales increase was due to price increases in the third quarter of 2010 and April 2011. Whole bean coffee sales slightly benefited from the price increases, partially offset by the continuing cannibalization of bean sales in retail stores by sales of Peet’s coffee in grocery stores.

In the specialty sales segment, net revenue increased $20.8 million, or 22.7%, compared to the corresponding period of 2010, as summarized by business channel below. The growth in grocery net revenue was due primarily to increased share in existing markets and to a lesser extent to the addition of new grocery store accounts. 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 increased due to price increases in the fourth quarter of 2010, partially offset by lower volume due to cannibalization from our grocery business.

	Thirty-nine weeks ended
(dollars in thousands)	October 2, 2011		October 3, 2010		Increase/(Decrease)
Grocery	$	70,913	$	54,563	$	16,350	30.0	%
Foodservice and office		29,683		25,575		4,108	16.1	%
Home delivery		11,978		11,620		358	3.1	%
Total specialty	$	112,574	$	91,758	$	20,816	22.7	%

Cost of sales and related occupancy expenses

As a percent of net revenue, cost of sales increased from 46.7% in the thirty-nine weeks ending October 3, 2010 to 49.1% in the thirty-nine weeks ending October 2, 2011. The increase from last year was due primarily to higher coffee costs and, to a lesser extent, milk costs and a shift in revenue mix towards the specialty channel where we have lower gross margins than our retail business, partially offset by the impact of price increases and lower shipping expenses.

In the retail segment, cost of sales and related occupancy expenses as a percent of net revenue slightly increased 0.8% as the impact higher coffee and, to a lesser extent, milk costs were largely offset by the impact of price increases.

In the specialty segment, cost of sales and related occupancy expenses as a percent of net revenue increased 4.1% as the impact of higher coffee costs outweighed the impact of price increases and lower shipping expenses.

For the remainder of the year, we expect cost of sales and related occupancy expenses as a percent of revenue to be substantially above last year levels, due to higher coffee costs.

Operating expenses

Operating expenses as a percentage of net revenue decreased 2.3% to 31.3%. The decrease was primarily due to the revenue mix shift from the retail segment towards the specialty segment, which has lower operating costs, the impact of price increases, and lower retail store payroll and overhead expenses.

In the retail segment, operating expenses as a percent of net revenue decreased 2.2% primarily due to lower payroll expenses in retail stores, the impact of the price increases, and leverage of overhead expenses.

In the specialty segment, operating expenses as a percent of net revenue decreased 0.6% primarily due to leverage of overhead expenses and the impact of the price increases, partially offset by higher legal expenses.

We expect operating expenses as a percent of net revenue in 2011 to continue to improve primarily due to the continued shift in business towards specialty channels.

Transaction related expenses

Transaction related expenses in 2010 include legal and related fees to comply with a subpoena the company received from the Federal Trade Commission in connection with its anti-trust review of the proposed Green Mountain Coffee Roasters acquisition of Diedrich Coffee. We did not recognize any transaction related expenses in 2011.

Litigation related expenses

Litigation related expenses consist of $3.3 million we incurred related to the settlement of a wage and hour class action lawsuit that was filed in February 2010. For the corresponding period of 2010, there was a $49,000 net reduction in costs incurred related to finalizing the settlement of a previous wage and hour class action lawsuit.

General and administrative expenses

General and administrative expenses increased slightly to $19.1 million, compared to $17.7 million for the corresponding period last year due to higher marketing costs

Depreciation and amortization expenses

Depreciation and amortization expense was consistent with the corresponding period last year.

Interest income, net

We invest in equity securities and interest-bearing, U.S. government, agency, and municipal securities. Interest income includes interest income and gains or losses from the sale of these instruments, net of interest expense. Interest income was lower compared to the corresponding period last year due to lower average investment balances.

Income tax provision

The effective income tax rate for the thirty-nine weeks ending October 2, 2011 is 35.7% compared to 36.2% during the thirty-nine weeks ending October 3, 2010 due to lower state income taxes from favorable state legislative changes and increased impact of the domestic production deduction. The Company does not expect unrecognized tax benefits to change significantly within the next 12 months.

Liquidity and Capital Resources

At October 2, 2011 we had $5.9 million in cash and cash equivalents and $6.0 million in short-term marketable securities. Working capital was $79.3 million as of October 2, 2011.

Net cash used by operating activities was $6.0 million for the thirty-nine weeks ended October 2, 2011 compared to net cash provided of $5.8 million for the same prior year period. Operating cash flows were lower than the prior year period primarily due to increased inventory purchases and other changes in working capital. Coffee inventories increased over the prior year due primarily to an increase in average cost per pound and, to a lesser extent, increased volume.

Net cash used in investing activities was $9.0 million for the thirty-nine weeks ended October 2, 2011 compared to $7.8 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 2, 2011, we purchased property, plant and equipment totaling $7.7 million consisting of improvements and equipment for two new stores, improvements to existing stores, equipment for our grocery and foodservice operations, and information technology software and hardware. In addition, we purchased $8.4 million of marketable securities, received proceeds from maturities of marketable securities totaling $6.3 million, and received proceeds from the release of restricted investments totaling $0.8 million.

Net cash used by financing activities for the thirty-nine weeks ended October 2, 2011 was $23.8 million compared to $17.3 million for the same prior year period. Financing activities primarily relate to repurchases of our common stock totaling $51.3 million, offset by proceeds from stock option exercises of $19.6 million and the excess tax benefit from exercise of stock options of $7.9 million.

The Company also has $50.0 million available through a credit agreement entered into on December 21, 2010 with Wells Fargo Bank, National Association, 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 Company’s obligations under the line of credit are guaranteed by the Company’s wholly-owned subsidiary, Peet’s Operating Company, in the principal amount up to $50 million and secured by substantially all of the Company’s and Peet’s Operating Company’s personal property. The line of credit has a maturity date of December 1, 2013.

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, determined on a daily basis, per annum of the Daily One-Month LIBOR Spread above 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 the Fixed LIBOR spread 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. The Daily One-Month and Fixed LIBOR spreads are based upon the Company’s leverage ratio calculated for the most recent quarter as follows:

Leverage Ratio	Daily One-Month LIBOR or Fixed LIBOR Spread
Greater than 2.00 to 1.00		1.50	%
Less than or equal to 2.00 to 1.00		1.00	%

The credit agreement contains customary affirmative and negative covenants. The credit agreement also includes financial covenants that require the Company to maintain a specified leverage ratio and a minimum amount of net income. The credit agreement includes customary 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, failure to make any payments when due with respect to certain other debt or certain failures to comply with the terms of such other debt, entry of certain judgments, inaccuracy of representations and warranties, occurrence of any event or condition that has a material adverse effect, and upon the occurrence of bankruptcy and other insolvency events and certain events relating to a dissolution or liquidation of the Company or Peet’s Operating Company, Inc.

During the thirty-nine weeks ended and as of October 2, 2011, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $50.0 million as of October 2, 2011. As of October 2, 2011, we were in compliance with these financial covenants.

Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as at October 2, 2011.

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, 2011, we had approximately $61.2 million in open fixed-priced purchase commitments and approximately $4.2 million in not-yet-priced commitments for a total of approximately $65.4 million with delivery dates ranging from October 2011 through April 2013. 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.

As of October 2, 2011, 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 2, 2011 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

Information set forth in Note 7, “Legal Proceedings,” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

The following risk factor has been updated from the disclosure provided in the 2010 Form 10-K:

Coffee costs have increased significantly over the past year and increases in the cost of high-quality Arabica coffee beans could impact the profitability of our business.

In the past year, we have experienced a dramatic rise in the costs of Arabica coffee traded on New York Board of Trade. In May 2011, coffee commodity prices reached a 34-year high at a level approximately 50% higher than they were six months earlier and over 120% higher than they were in May 2010. Prices began to decline in October 2011 to levels approximately 80% higher than May 2010. While we do not purchase coffee on the commodity markets, price movements in the commodity trading of Arabic coffee beans impact the prices we pay. We expect the coffee commodity market to continue to be challenging as the market continues to be influenced by worldwide demand, the weakness of the dollar, speculative trading and weather and as Brazil – the largest coffee producing country – enters a cyclically low production year in its biennial Arabica crop cycle. We typically fix the price of our coffee needs for the next six to 18 months by purchasing and holding large inventories of green coffee and utilizing future fixed price purchase commitments. As of October 2, 2011, our inventory and fixed price commitments are sufficient for our remaining 2011 production and virtually all of our anticipated 2012 needs. Since the coffee we purchase comes from over 20 different countries and includes 28 different types of coffee (including 12 single origin coffees), these coffees are not necessarily interchangeable or substitutable and therefore the covered needs of specific origin coffees varies due to differing growing seasons and origin specific situations. Given the concentration of coffee in our cost structure, if coffee costs do not decline and we are unable to pass along increased coffee costs to our customers through price increases, our margin and profitability may decrease. We expect to continue to monitor these markets and take actions we feel are appropriate to minimize the impact on us in the short and long-term.

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 4, 2011 - August 7, 2011		95,621	$	60.13		1,169,744		830,256

August 8, 2011 - September 4, 2011		88,034	$	56.92		1,257,778		742,222

September 5, 2011 - October 2, 2011		12,987	$	56.98		1,270,765		729,235

(1)

Repurchases were made pursuant to two stock repurchase programs, one announced on September 9, 2010, providing for the purchase of up to one million shares of the Company’s common stock, with no deadline for completion, and another on May 27, 2011, providing for the purchase up to one million additional shares of the Company’s common stock, with no deadline for completion. No further purchases will be made under the stock repurchase program announced September 9, 2010. 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 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).

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.

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

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 10, 2011	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Vice President, Chief Financial Officer and Secretary

Attached files

PEETS COFFEE & TEA INC Reports

Also read