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Subject:  Peet's Coffee and Tea Date:  3/8/2006  8:23 PM
Author:  pencils2 Number:  12 of 23

Peet's Coffee and Tea

~Starbucks founder is on the board of directors
~Growing consistently and increasing revenue
~Strong balance sheet for a small-cap


A Dutch immigrant, Alfred Peet, started Peet's Coffee and Tea. Peet arrived in San Francisco in the 1950's and opened the first Peet's in 1966. The store did very well; many people would line up just to get a fresh cup of coffee. A second Peet's opened in 1971. Inspired by Peet's, Jerry Baldwin went to Seattle and started Starbucks. Alfred Peet sold Peet's in 1979 to a coffee machine importer, Sal Bonavita. Two more stores were built in a span of four years after that, then surprise, surprise! Jerry Baldwin bought Peet's Coffee and Tea in 1984. Because of increasing duties at both Peet's and Starbucks, Baldwin sold Starbucks in 1987, and is still on Peet's board of directors today. Peet's only had four stores once Baldwin took over. Baldwin had resisted aggressive expansion at Starbucks, but he realized Peet's days as a small company should end. He let new blood come in to start expanding Peet's. Soon 5-6 Peet's were being built a year, and the wholesale business was picking up business as well. Peet's IPO was in 2001 when they wanted to really become a gourmet coffee supplier and reach new customers.


Peet's Coffee and Tea is a marketer of fresh coffee beans and a specialty coffee roaster. Freshness is all Peet's. Peet's has strict freshness rules for their coffee and tea, something that giant Starbucks doesn't quite have (They have some less strict freshness standards as far as I know). Peet's offers fresh tea leaves, another thing that isn't too common in the U.S. these days. Peet's also offers fresh pastries in their retail shops.

Peet's also does the wholesale business, you will see their coffee and tea in many grocery stores. Peet's grocery accounts have gone from 130 to 3500 in the last three years!

Peet's has one roasting facility, but they are planning to build a new facility this year to meet their total demands. Now, you may be wondering, why are there so few Peet's retail shops? First, Baldwin was not very heavy on expansion. He opened one store per year, which is why he stepped aside as CEO and let a more aggressive team come in to expand the business. Second, Peet's has only recently boosted their wholesale business to a great number, now they are making much more revenue from that business. I think that management did a good job being patient, building up the cash, and now they are doing heavier expanding.

At year-end, Peet's had 92 retail shops, 20 built last year. For fiscal 2006, Peet's hopes to build 23-28 new shops and that roasting facility. Look at this graph to see Peet's sales, retail makes nearly twice as much as specialty sales (Grocery outlets is the main specialty).

Construction on the new roasting facility (It will be in Alameda, California) is scheduled to start this April and finish in December. Once it is finished, the estimated cost will be around $24 million.
                                   13 weeks   14 weeks   52 weeks    53 weeks
January 1, January 2, January 1, January 2,
2006 2005 2006 2005

Retail stores $33,453 $30,381 $118,030 $100,444
Specialty sales 17,180 14,689 57,168 45,239
Net revenue 50,633 45,070 175,198 145,683

Operating expenses:
Cost of sales and related
occupancy expenses 23,806 20,834 80,374 67,189
Operating expenses 16,329 14,270 59,060 48,530
Marketing and advertising
expenses 1,333 1,162 4,008 3,775
Depreciation and amortization
expenses 1,934 1,628 7,299 5,794
General and administrative
expenses 2,325 2,538 8,757 7,262

Total operating costs and
expenses 45,727 40,432 159,498 132,550

Income from operations 4,906 4,638 15,700 13,133

Interest income, net 593 267 1,769 922

Income before income taxes 5,499 4,905 17,469 14,055

Income tax provision 2,059 1,713 6,782 5,270

Net income $3,440 $3,192 $10,687 $8,785

Net income per share:
Basic $0.25 $0.24 $0.77 $0.66
Diluted $0.24 $0.23 $0.74 $0.63


Peets currently has a market cap of 420.67 million. Peet's has a very nice $53.08M in cash with no debt, a current profit margin of 6.1% and operating margin of 8.96% (Trailing Twelve Months). These charts show the situation.
January 1, January 2,
2006 2005


Current assets
Cash and cash equivalents $16,996 $11,356
Short-term marketable securities 36,080 --
Accounts receivable, net 5,152 4,136
Inventories 16,148 12,614
Deferred income taxes 1,514 1,403
Prepaid expenses and other 3,372 2,280
Total current assets 79,262 31,789

Long-term marketable securities 16,890 52,057
Property and equipment, net 46,313 40,588
Intangible and other assets, net 5,434 3,455

Total assets $147,899 $127,889


Current liabilities
Accounts payable $5,523 $5,710
Accrued compensation and benefits 5,563 4,266
Deferred revenue 3,415 2,394
Other accrued liabilities 3,030 3,372
Total current liabilities 17,531 15,742

Deferred income taxes 1,759 838
Deferred lease credits and other long-term
liabilities 2,537 2,182
Total liabilities 21,827 18,762

Shareholders' equity
Common stock, no par value; authorized 50,000,000
shares; issued and outstanding: 13,902,000 and
13,500,000 shares 99,273 93,091
Accumulated other comprehensive loss, net of tax (76) (152)
Retained earnings 26,875 16,188

Total shareholders' equity 126,072 109,127

Total liabilities and shareholders' equity $147,899 $127,889

Peet's ended 2005 with cash and cash equivalents of $70M, compared to $64.3M at year-end 2004. What I really like here is this: Peet's is doing the heaviest expansion of its history. This is the most aggressive they have been ever! But they are still increasing revenues, improving sales, and they aren't racking up too much debt. I have never seen a small-cap company do this so well (Although I'm sure you have!), if they can continue to do what they have been doing, I believe this could be an opportunity at our feet.


Patrick O'Dea, CEO, age 43

Patrick has served on Peet's board of directors since May, 2002, I have been impressed with his management of the company and I hope he will be CEO for many more years. Prior to working at Peet's, he was CEO of Archway/Mother's Cookies and Mother's Cake & Cookie Company for 4 years. He has had various other jobs at Stella Foods and Procter & Gamble.

Thomas Cawley, CFO, age 44

Thomas has been Peet's CFO since July, 2003. Prior to working at Peet's, he was CFO at Gap Brands, had various jobs at Yum! Brands, PepsiCo, Pizza Hut, The Quaker Oats Company, and General Foods.

James Grimes, Vice President of Operations, age 49

James has served at Peet's since July, 2002. Prior to this, James worked with Archway/Mother's Cookies, Mother's Cake and Cookie Company, Frito Lay, and Procter and Gamble. In 2001 he founded Supply Chain Consulting.

Peter Mehrberg, Vice President, age 46

Peter has been Vice President of Peet's since 1997. He has worked in some different roles with the company. Mehrberg served as Director of Real Estate from 1994 to 1997. Before joining Peet's, he worked in law and real estate.

Bruce Schroder, Vice President, age 45

Bruce has been VP since 2003, he is also the General Retail Manager and has worked with various parts of Peet's. Bruce was also CEO for, worked at PepsiCo for 16 years, The North American Coffee Partnership, and SoBe.

To learn about Peet's roasters, take a look at this: