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Peet’s reported strong results of Q2 EPS $0.38 vs consensus of $0.32; revenues also beat expectations of $90.6M and consensus of $88.7M.  PEET has been a favorite name of mine since late 2010.

The following are my top ten takeaways from the quarter.

  1. The company raised full year EPS guidance "toward the higher end" of prior $1.43-1.50 range versus consensus of $1.46 and full-year revenues growth of +10-12% versus prior guidance +8-10%.
  2.  Peet ‘s is rolling out a new product entry into the largest segment of the specialty coffee category in grocery stores with the debut of two new medium-roast coffees (1/3 of sales in the category) in ground and whole bean form: Peet’s Café Solano and Peet’s Café Domingo.  It is expected that the new line will be available in about 80% of the company’s existing store base before the end of this calendar year.
  3. Management does not expect cannibalization from the new products; new products will be sold at the same margin.
  4. Grocery grew 30% in Q2, lapping 29% growth in Q2 last year and up from 22% growth in 1Q11 and is now 70% bigger than it was two years ago.
  5. Grocery to accelerate growth in 2H11 on the back of the new products.
  6. The company will be selling product in 1,000 new stores in 2H. 
  7. Significant expansion in the TGT stores; management is expecting to double the number of target stores distributing Peet's Coffee to about 900 by the end of 4Q.
  8. Gross margins declined -290bps in the quarter on 37% higher coffee costs in 2Q.  Coffee inflation for the year is projected to be +40% so gross margins will be down 200-300 basis points versus the second quarter in 3Q and 4Q.
  9. There was no significant change in pricing quarter to quarter.  In 2Q, there was a full quarter impact of the grocery price increase taken in February 2011.
  10. PEET is one of the best small cap growth stories in the restaurant space.  Valuation is rich but there is a premium for well run companies that are seeing 8-10% secular growth. 

Howard Penney

Managing Director

Rory Green

Analyst