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No. of Recommendations: 3
Rumor is rocking the coffee world. GMCR was up to around $48 on some Starbucks speculation--a partnership or distribution channel. There is no way to keep up with the craziness. All this over single serve coffee--who knew

Did a DCF of PEET

PEETs is in extreme overvalued-land at present. I have never tried to put a dollar value on it. After the last quarter and CC, there is enough information to make some assumptions on growth and margins. Those are two critical parts of a DCF

The first is the consolidated company

The model gives the company 10 years of high growth ending in a stable terminal value

Looking back through the company’s past growth and margins gives us a starting point for growth considerations and margin evolution. Consolidated operating margin has fluctuated over time. A decade ago it was 6%. It dropped to 4% in 2007 and rebounded to 8% in 2010 presumably from the better margin grocery business increasing as a percentage of the business

Growth has been good. Revenue has nearly doubled in just 6 years


The consolidate model builds in slowing growth as the company puts the brakes on retail openings. It also builds in increasing operating margins as grocery expands its distribution channels and brand awareness.

The value is helped by the lack of debt
The risk premium is 11%
Beta is 1

The 10 year CAGR works out to 9%. At that rate of growth revenue will a little more than double in 10 years—1.3X. That represents significant slowing compared to historic rates attributable to fewer retail builds guided by management and the increasing grocery business that does not create new revenue as quickly as a retail store can. Terminal growth is below the historic GDP of 3% and is 2%. That will slightly underperform the macro-economy, but allows for increases from low levels of inflation.

The margins start at the current 8% and increase to 9% at year 10. The increase is due to expectations grocery will improve overall operating margins slightly.

The value is $39

Out of curiosity I did the two segments separately. Adjustments were required to estimate what part of capex and working capital were due to each. I used a 60% /40% retail/grocery for WC but an 80%/20% for capex since retail outlets require most of the spending. The unaccounted SG&A had to be divvied up between them to make the total work when compared to the consolidated business

• risk is 11%
• beta is 1
• Capex is 80% portioned to retail and 20% to grocery
• Depreciation is found in the filings as it applies to each
• Growth in capex and depreciation grow at the same rate as revenue


Ten year retail growth was a compounded 10% in the model. This would allow for organic growth of around 5% and new builds around 5% that works out to around 8 to 10 per year. That may be conservative. Terminal growth was 2%. Currently they have 192 stores and plan on 5 new builds in 2011. The model would anticipate around 90 new stores in 10 years and a total of 282 in 10 years—a 47% increase. In 2000, 10 years ago they had 60 retail stores. The store base has grown 2.2X. The model anticipates that will slow significantly in the next decade to just 47%.

Margins start at 3%. This is lower than we see on the 10K due to the inclusion of a share of SG&A that is unallocated. The margin increases to 4% by year 10 and 5% in the terminal year. This assumes some operating efficiencies over the units as business improves post-recession if that ever happens.

The revenue doubles by year 7 and then another 25% by the terminal year. Current revenue is $201 million. The model gives them $506 million in year 10 and $516 in the terminal year

The value is $8.52


Grocery is the growth vehicle for PEETs if they slow retail as they have indicated they will. The model allows grocery a CAGR over 10 years of 11%. Revenue more than doubles by year 10 at 1.5X.

The margins start at 18.6% adjusted for unallocated SG&A. They decrease over time and end at 17% to account for competition.

The value is $30.05

No matter which way you slice it, PEETs is selling at a premium which is surprising given the muted guidance for 2011 and the slow pace of retail growth in new stores.
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