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.
- 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%.
- 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.
- Management does not expect cannibalization from the new products; new products will be sold at the same margin.
- 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.
- Grocery to accelerate growth in 2H11 on the back of the new products.
- The company will be selling product in 1,000 new stores in 2H.
- 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.
- 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.
- 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.
- 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.