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Caribou Coffee Company Inc. (CBOU)

Q2 2008 Earnings Call

August 5, 2008 4:30 pm ET

Executives

Kathleen Heaney - Integrated Corporate Relations

Roz Mallet - Past Chief Executive Officer

Kaye O'Leary - Chief Financial Officer

Mike Tattersfield - Newly appointed President and Chief Executive Officer

Analysts

Julie Welter - Piper Jaffray

Presentation

Operator

Welcome to the Caribou Coffee Company, Inc. second quarter 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Kathleen Heaney.

Kathleen Heaney

Caribou Coffee's Second quarter 2008 earnings press release was distributed this afternoon, August 5, 2008 after the market closed. If you do not have a copy, one may be found on the website at cariboucoffee.com in the Investor Relations section.

Joining me today are Mike Tattersfield, recently appointed President and Chief Executive Officer; Roz Mallet, past CEO; and Kaye O'Leary, Chief Financial Officer. Before we get into a discussion of the second quarter results, I need to read the Safe Harbor statement.

Part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them. The company undertakes no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this conference call.

We refer all of you to Caribou Coffee's recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions. During this call, management will discuss financial terms such as EBITDA, which is a non-GAAP measure. While this is a non-GAAP measure of financial performance, we believe it is a common and useful tool in evaluating the company's performance.

A reconciliation to comparable GAAP measures can be found on the last page of today's press release as well as on the website in the Investor Relations section. Following the presentation Roz and Kaye will be available to answer your questions.

With that I would like to turn the call over to Roz Mallet.

Roz Mallet

Good afternoon, everyone, and thank you for joining us today for the Caribou Coffee second quarter 2008 earnings conference call. I will first discuss the business highlights for the quarter and Kaye will then review the financials.

Although, Kaye will discuss the financials in more detail I am pleased to report that our results as you read in the press release we issued earlier today, were better than market expectations. We’ve been expanding the Caribou Coffee brands to franchise coffeehouses, our commercial business and stronger unit level performance. As a confirmation of this strategy we reported an increase in revenue while continuing to manage the store portfolio with an additional six store closures in the quarter.

Nevertheless we are not satisfied with these generally positive results and are working diligently to improve the overall profitability of the company. As a reminder last year we began the process of aggressively managing our coffeehouse portfolio and closed 28 underperforming location; we are continuing to process this year. In conjunction with those product and operating initiatives at the coffeehouses to improve general economics, we are improving the overall health of our store base.

Despite the worsening consumer environment, we are making progress. We’ve done work on the store base as well as new product initiatives enabling us to report comps of negative 1.7% in the quarter, better than the overall industry. In contrast, our international units are experiencing very strong growth. We are particularly pleased to report that comps in these units were up 20% in the quarter.

Now about to our retail stores; through June we have closed 20 company-owned stores. We all well on our way to closing a similar amount of coffeehouses as 2007 level was previously disclosed. Our ongoing company-owned portfolio management process is the key part of our strategy to return to possibility. While we continue to focus on improving store economics we have slowed the pace of news store opening. As a result we did not open any company-owned units in the quarter.

However, given the demand we see for the Caribou Coffee brand we have accelerated franchise coffeehouse development. During the second quarter 12 franchise coffeehouses opened bringing the six months total to 23. We now have 75 franchise coffeehouses up from 39 at the end of the second quarter 2007.

As I mentioned last quarter, our franchising program continues to evolve to include store within a store locations and non traditional locations, which will help us introducing grow the brand in the market. At the end of second quarter we had 15 stores in our store locations and grocery stores in college campuses. We have an additional 20 individual store agreements signed, which have not yet opened. We are always looking for and will continue to evaluate opportunities to expand the brand and to expand the Caribou Coffee experience with customers in the new markets using these locations.

We spent a lot of time during the last conference call discussing the initiatives we are undertaking to improve unit level economic analyzing. Everything that we do in the coffeehouses has been under review including our products throughput, store prototype, labor deployment, growth capacity optimization and equipment utilization.

At the store level we’ve been focusing on ways to improve our controllable profit. As a result we are redesigning our labor deployment practices as well as our theoretical labor model measured against our recipe platform. We saw a slight improvement of labor in the second quarter and as we begin to implement other initiatives, we expect to see further improvement.

Read the rest of this transcript for free on seekingalpha.com