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Marissa Oberlander/MEDILL

Peet's earnings spiked last year on an $8.5 million break-up fee received after a failed merger with Diedrich Coffee.

Peet’s Coffee’s profits take a spill but analysts remain lukewarm

by Marissa Oberlander
Feb 17, 2011

Peet’s Coffee & Tea Inc. reported a big drop in fourth quarter earnings Wednesday but met Wall Street expectations. The company attributed the sharp decline to one-time items that inflated earnings in the year-earlier quarter. 

In the fourth quarter ended Jan. 2, Peet’s earned $6.4 million, or 48 cents per diluted share, down 38 percent from $10.3 million, or 76 cents per diluted share, in the year-earlier quarter. The coffee roaster and retailer operates two retail locations in the Chicago area and sells its coffee at more than 50 local grocery stores. 

Without one-time items that included a break-up fee on a failed merger in 2009, Peet’s would have earned $6.4 million, or 48 cents per diluted share, up 31 percent from $4.9 million, or 36 cents per diluted share, in the year-earlier quarter. Analysts surveyed by Zacks Investment Research Inc. were expecting fourth-quarter earnings of 48 cents. 

Peet’s, based in Emeryville, Calif., attributed increased operating earnings to margin improvement and 24 percent growth in its consumer packaged grocery business. 

Peet’s fourth-quarter revenues were flat at $91.6 million. 

Tom Cawley, chief financial officer, said in a conference call that the company will manage rising coffee bean prices in 2011 by hedging through forward buying, price increases and cost reduction. The company began raising retail prices in December and expects significant earnings growth in the first half of 2011 on the price hikes. 

Mitchell Pinheiro, analyst with Janney Montgomery Scott LLC, said he maintains a neutral rating on Peet’s stock and feels a little nervous about its outlook for 2011.  Peet's announced price hikes to counter higher coffee costs, which should have increased the company's 2011 earnings guidance.  Pinheiro said maintaining 2011 guidance from the previous quarter signals the company's significant need to reduce operating costs in the form of improved staffing and reduced waste. 

Pinheiro said Peet’s is the highest priced coffee in the grocery aisle and he anticipates some consumers will trade down to less expensive offerings this year as people look to maintain their coffee budget. 

“When it comes to food service and their stores, Peet’s, Starbucks, Dunkin’ Donuts, it generally comes down to convenience,” he said. “But there is a different mentality in the grocery aisle.” 

Matthew DiFrisco, an analyst with Oppenheimer & Co. Inc., said Peet’s shares are fairly valued and maintains his “market perform” rating on the stock. He thinks the company will continue to grow its market share in the grocery channel in 2011, most notably in Wal-Mart Stores Inc., despite challenging commodity price headwinds. 

Larger brands such as Starbucks are not raising grocery store prices as aggressively as Peet’s, probably with an eye to taking more market share, DiFrisco said. But Peet’s strategy is to cater to consumers who are not price sensitive and value a premium product. 

In the full year 2010, Peet’s earned $17.5 million, or $1.28 per diluted share, down 9 percent from $19.3 million, or $1.44 per diluted share, in 2009. 

Without one-time items, Peet’s would have earned $18.1 million, or $1.33 per diluted share, up 30 percent from $13.9 million, or $1.04 per share. 

Revenues came in at $333.8 million, up 7 percent from $311.3 million in 2009. 

Peet’s maintained its 2011 fiscal guidance. The company expects net revenue to grow 8 to 10 percent and expects diluted earnings per share to come in between $1.53 and $1.60. 

Peet’s stock closed at $41.39 a share Thursday, down $1.61.