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Caribou Coffee: Drop in K-Cup sales hurts 3Q revenue

Company aims to improve its packaged coffee business in 2013

Sales declines in its consumer packaged goods division dragged third-quarter earnings down slightly for Caribou Coffee Inc., but executives for the coffeehouse chain expressed optimism that same-store sales would continue to rise and that growth could accelerate next year.

For the Sept. 30-ended quarter, Caribou’s net income fell 3.6 percent to $1.72 million, or 8 cents per share, compared with $1.79 million, or 9 cents per share.

Revenue declined 5.2 percent in the quarter to $77.2 million, driven largely by a 40-percent drop in sales of consumer packaged goods. Same-store sales at its domestic coffeehouses rose 3.5 percent during the period, but commercial sales fell to $11.9 million from $19.8 million a year earlier, reflecting a precipitous drop in single-serving coffee for Keurig home-brewing systems, commonly known as K-Cups.

Caribou’s distributor of K-Cups, Green Mountain Coffee Roasters, no longer sells Caribou’s branded packets to major wholesale clubs like Costco.

“While the overall top line of this business was down significantly from last year, it was essentially right on our expectations for the quarter in light of the impact of reduced green-coffee sales to Green Mountain related to the current portion packet business,” chief executive Mike Tattersfield said during Caribou’s earnings call.

Caribou laid out plans to turn around the packaged coffee business and grow sales of that line by 10 percent next year by adjusting the mix of K-Cup sales to meet new expectations and by growing the number of grocery stores selling its bagged coffee. The brand plans to tackle that initiative and also grow its unit count between 10 percent and 12 percent in 2013 in part by reinvesting nearly $4 million of savings expected next year from commodity cost deflation for coffee.

Planning for a tailwind in 2013

Chief financial officer Tim Hennessy noted that Caribou Coffee would have an additional $4 million for capital expenditures thanks to its coffee procurement, which has prices for coffee locked in through the third quarter of 2013.

“We think that’s the right thing for us to do on a longer-term basis: use this opportunity to invest next year and keep focused on the long haul of where we’re trying to take the company,” Hennessy said.

Caribou is forecasting same-store sales growth between 2 percent and 4 percent next year, coming in large part from new products in both its food and beverage platforms. New items expected to drive sales next year include a line of quiches that are expected to roll out systemwide in the first quarter of 2013.

“This additional food platform will drive incremental benefits and return on our investments we made in our oven technology in 2010,” Tattersfield said. “We expect quiche to play a key role in our expanding food ticket in that it appeals to guests in both the breakfast and lunch dayparts.”

Line extensions next year also will expand upon the sparkling tea and juice platforms launched earlier this year with new “light” options for the summer of 2013.

Probably 1 percentage point of the 3.5-percent same-store sales increase came from new sparkling teas and juices, Tattersfield said, adding that upgrades to the bakery line would start to pay better dividends in future quarters.

“It was really important for us to get into the cold-beverage business,” he said. “Then as we revitalized the bakery system — this only started happening in August, so you’re seeing that one period that we’re thinking about this. The bakery case was lagging because we were driving the sandwich business.”

Ramping up unit growth, CPG sales

Caribou officials said the company-owned stores should continue their improved sales levels, as units that opened this year or will debut next year are going into mature markets where the chain is getting more efficient.

“While it is early, we expect that our 2012 store openings will perform at a higher average sales volume than our 2011 class, in part due to more stores in markets where our current portfolio performs exceptionally well,” Tattersfield said.

The planned 15 to 20 company-owned coffeehouses projected to open next year would build out key corporate markets of Minnesota, the District of Columbia and Chicago. Tattersfield said he was most encouraged by the fact that 60 percent to 70 percent of those stores are already under lease, and real estate sites for the remaining units are already identified.

“It’s the first time in our history we’re actually looking at a pipeline of stores in front of the year that we’re developing,” he said. “So really it’s the opportunity of how disciplined are we being with development. What I’d like to continue focusing on is a system approach, where we’re trying to do 10 percent to 12 percent on a yearly basis, which incorporates both the franchise side and international.”

As for growing sales of packaged coffee, Caribou would make incremental investments in promotions and advertising that line of business and look to form partnerships with more grocery stores to carry the chain’s bagged coffee and K-Cups. In the third quarter, Caribou formed such a deal with Jewel-Osco, the largest grocery store chain in Chicago, which brought the total number of grocery stores carrying Caribou products to more than 9,000, Hennessy said.

“It’s primarily trade activity we’re doing along with consumer marketing programs,” Hennessy said. “We are looking at some specific tests we’re going to run from a consumer standpoint in a couple select markets. That’s predominately been our focus in driving commercial businesses, expanding doors with existing relationships or bringing on Jewel-Osco account.”

Caribou Coffee operates 408 coffeehouses and franchises another 188 locations in 22 states, the District of Columbia and 10 international markets.

Contact Mark Brandau at [email protected].
Follow him on Twitter: @Mark_from_NRN

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