We have maintained our Neutral rating on
Peet's Coffee & Tea, Inc.
) with a target price of $67.00 following first quarter 2012
Peet's delivered operating earnings of 25 cents per share in the
first quarter of 2012, which missed both the Zacks Consensus
Estimate and the prior-year earnings of 31 cents and 41 cents per
share, respectively. The first quarter results plunged owing to
high input costs, especially for coffee.
We are encouraged by Peet's strategy to sell premium-quality and
premium-priced product in its specialty coffee segment. Besides the
Peet's brand, which is already the quality and price leader in the
dark-roast segment, the company introduced the Godiva
chocolatier brand coffees in 2009 in order to enter the
medium-roast segment. Moreover, in July, Peet's introduced its new
Light Freddo line of blended iced coffee beverages, which have up
to 50% fewer calories than their regular Freddo counterparts. In
August, the company entered the largest product segment of the
specialty coffee category in grocery stores with the debut of two
new medium-roast coffees in ground and whole bean form: Peet's Café
Solano and Peet's Café Domingo.
Sales climbed 7% in the reported quarter, on the back of strong
fundamentals, robust business growth and strong sales growth
through its various distribution channels. The company has improved
its top-line since the past three years with a year-over -year
increase of 7.2%, 9.3% and 14.2% in 2009, 2010 and 2011,
The company also expects continued revenue growth in 2012 from
further expansion of the grocery and foodservice businesses and
existing retail stores. In retail, the company expects to open new
stores in strategic west coast locations, and in grocery, the
company expects to continue to expand into new markets like western
U.S., eastern seaboard and other selected markets. In addition,
Peet's will expand its presence in the foodservice and office
environment too. All these efforts bode well for the company's top
line growth in the long term.
However, rising coffee costs have negatively impacted the
profitability of the company since many years. Coffee prices have
increased significantly since 2005, and in 2011, coffee costs were
42% higher per pound than in 2010. Further, green coffee costs have
also been rising since 2008.The company expects the coffee prices
to increase further with the growth of the specialty coffee
Moreover, the specialty coffee category is highly competitive
and fragmented among various distribution channels.
) is the largest competitor in category. The company is also facing
stiff competition from the emerging coffee makers, who intend to
brew a single cup at a time. The United States single cup market is
currently dominated by
Green Mountain Coffee Roasters
) with its cartridge-based Keurig K-Cup brewing system. Starbucks
is the exclusive, licensed super-premium coffee brand produced by
Green Mountain for the Keurig Single-Cup brewing system. Presently,
Peet's is lagging behind and requires to enter an agreement with
the owner of the brewing system to have Peet's-branded coffee and
tea available in cartridges that work in the brewers.
Though Peet's offers premium quality coffee backed by superior
price position in the market, the higher cost inflation and
difficult macro-economic environment keep us on the sidelines
with a Neutral rating.
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