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Peet's Coffee _ Tea _NYSE PEET_1

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Peet's Coffee _ Tea _NYSE PEET_1 Powered By Docstoc
					Peet’s Coffee & Tea (NYSE: PEET)1
Mandy Gray
Katherine Jonas
Jennifer Tao


December 7, 2007

business overview

Peet's is a specialty coffee roaster and marketer of fresh roasted whole bean coffee with a focus on
artisan roasting practices and the freshness of the coffee's ingredients. Peet's markets its coffee
through online sales and a mail order service. It also distributes its products through specialty food
and grocery stores, as well as offices, restaurants, hotels and its own retail store locations. The
driving force of Peet's Coffee & Tea is the desire to be the gold standard specialty coffee and tea
brand available to the world, with one of the most dedicated and loyal customer followings of any
brand. The company strives to enable and inspire customers to enjoy Peet's Coffees & Teas by
providing a distinctive, superior product, superior coffee and tea knowledge and superior service to
every customer, every day. Peet's largest presence is in California, but they have recently expanded to
the northeastern United States. In 2003, they unsuccessfully attempted to expand in Japan by
opening 4 retail locations, but all of them were closed within one year due to competition from
Starbucks and other retailers in Japan.


Peet's Coffee offers a wide selection of retail products consisting fresh roasted whole bean coffee,
premium blends, sweets, and tea, in addition to providing freshly brewed coffee, tea, beverages, and
baked goods. Essentially, it has two segments: retail stores and specialty sales, which consist of sales
to home-delivery customers, grocery stores, offices, food service companies, and restaurants. The
stores are designed to facilitate the sale of fresh whole bean coffee and encourage customers to
purchase packages of blends to be home-brewed. The specialty sales have expanded from individual
home delivery to a network of grocery stores. Within the coffee business, Peet's is well known for
its commitment to providing high-end, premium coffee blends. The chain encourages customers to

1
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try different coffee bean blends and emphasizes their unique specialty blends, which vary by season,
location, and flavor. Thus, each store has a dedicated staff person at the bean counter to take orders,
handscoop and grind beans to the customers' specifications, and assist them with questions on
coffee origins.

Since 2001, Peet's Coffee has been under the guidance of CEO Patrick O'Dea. A long time member
of the Peet's management team, O'Dea plans to expand sale of Peet's coffee beans in grocery stores,
introducing the brand at one thousand new locations this year. This October, Kay Bogeajis was
appointed Vice-President of retail operations, where she will be responsible for Peet's 160 shops, as
well as Peet's coffee sold through grocery stores nationwide. Bogeajis' is widely anticipated to bring
growth and experience to the company, having previous experience managing retail operations for
1,400 of Taco Bell's restaurants, as well as experience with the Frito-Lay company and Burger King.

Also in October or this year, Chris Lansing was promoted from Chief Marketing Officer to General
Manager or consumer business and CMO. Lansing was largely credited with the successful
introduction of Peet's Coffee to the New England market, and will now be responsible for grocery
and direct channels of sales. He plans to expand upon Peet's direct-to-store delivery program. Peet's
also welcomed Libby Sartain to Peet's board of directors this October. Sartain, currently Executive
Vice-President at Yahoo, brings with her 30 years of experience in human resources. The founder of
Peet's Coffee recently passed away.




competition from Reuters


Competitor           Role                                               Trends
                                                                        Diedrich's stock prices over
                                                                        the past 5 years have generally
                                                                        declined, alongside Peet's.
                     Diedrich Coffee Company, a specialty coffee        Although both companies
                     roaster, wholesaler and retailer, was              cater to wholesale buyers,
                     incorporated in 1985. Like Peet's, Diedrich's      Peet's focus on premium
                     sells light food items, specialty beans and        roasting techniques and high
                     espresso blends. However, unlike Peet's, most      quality set it apart from
Diedrich Coffee
                     of Diedrich's sales are wholesale to office        Diedrich's. Since Diedrich's
(DDRX)
                     buildings and hotels. Most of Diedrich's           supplies markets where the
                     Coffee stores are located in Orange County,        consumer has little choice
                     California, although Gloria Jean's, a sub-brand    over the brand of coffee they
                     of Diedrich's Coffee, has retail outlets in 33     receive, Peet's can capitalize
                     states.                                            on the demand for high
                                                                        quality beans and beverages
                                                                        which dominates the coffee
                                                                        market.
                 The Coffee Holding Company is a wholesale
                 vendor of green coffee beans, private roasts,       Coffee Holding Company has
                 and branded roasts. The Coffee Holding              maintained a steady stock
                 Company was founded in 1971 by Sterling             value which continues to
                 Gordon, who has ceded leadership of the             increase with news of the new
                 company to his two sons, Andrew and David           contract with Entenmann’s,
                 Gordon, who are now president and vice-             despite declining share prices
                 president of the company, respectively. Green       among other coffee roasters.
Coffee Holding
                 coffee beans are imported from Colombia,            Since Coffee Holding
Company (JVA)
                 Mexico, Kenya, Uganda and Brazil, and               Company imports green
                 roasted at the companies facilities in Colorado.    beans directly, it firmly
                 This fall, the Coffee Holding Company               controls its supply line, and is
                 entered into a three-year contract with             sheltered from much of the
                 Entenmann’s Products, Inc., in which the            competition between retail
                 Coffee Holding Company will produce a               companies such as Peet’s and
                 specially-roasted line of beans for sale under      Starbucks.
                 the Entenmann’s brand.
                 Founded in 1950 by Bill Rosenberg in Quincy,        Dunkin’ Donuts is privately
                 Massachusetts, Dunkin’ Donuts has one of the        owned by private equity firms
                 longest and most established histories in the       Bain Capital LLC and Thomas
                 New England region. With over 12,000 points         H. Lee Partners, which
                 of distribution worldwide, Dunkin’ Donuts is        bought the company in 2005
                 one of the largest coffee retailers in existence.   for $2.4 billion. By providing
                 In addition, Dunkin’ Donuts has recently            fast, consistent service at a
                 begun selling roasted coffee beans through its      plethora of convenient
                 stores and online, and has secure relationships     locations, Dunkin’ Donuts
                 with airlines, hotels and restaurants that serve    has established itself as a
                 Dunkin’ Donuts brand coffee.                        favorite coffee supplier to
                                                                     customers in the New
                                                                     England region. New
Dunkin' Donuts
                                                                     advertising campaigns
(Private)
                                                                     featuring the slogan “America
                                                                     Runs on Dunkin’s” have
                                                                     allowed Dunkin’ Donuts to
                                                                     promote itself as the brand of
                                                                     choice for the average
                                                                     American consumer, giving it
                                                                     a broad base in the coffee
                                                                     market which Peet’s Coffee is
                                                                     unlikely to equal.
               Caribou Coffee Company, founded in                       Caribou Coffee occupies a
               Minneapolis, Minnesota in 1992, is both a                market very similar to Peet’s
               wholesale seller of coffee beans – both                  Coffee, and poses direct
               through its retail locations and through                 competition to the brand. At
               grocery store displays – and coffee products.            this time, Caribou’s location,
               Based on the number of coffeehouses,                     which is largely concentrated
               Caribou coffee is the second largest company-            in the Midwest, does not
               owned gourmet coffeehouse operator in the                overlap with Peet’s, so
               United States, with locations in eighteen states.        although the retail locations
               The company offers espresso drinks, tea,                 do not compete directly, sale
Caribou Coffee
               baked goods, whole bean coffee and branded               of coffee beans on-line
Company (CBOU)
               merchandise at its stores, with an emphasis on           compete for the same market.
               quality goods, from roasting to brewing. Since           Since the company went
               2003, Caribou Coffee Company has been led                public in September of 2005,
               by CEO by Michael J. Coles.                              stock prices have consistently
                                                                        fallen. This has led to many
                                                                        repurchasing initiatives by the
                                                                        board of directors, but these
                                                                        have been unsuccessful in
                                                                        rallying stock prices.

                    Green Mountain Coffee Roasters sells more           There is certainly overlap with
                    than 100 high quality coffee selections, and        Peet’s in terms of competing
                    offers one of the largest selections of double-     for customers (offices and
                    certified Fair Trade organic coffees in the         individuals) who wish to
                    country. Although it provides similar products      purchase coffee blends. On
                    as Peet’s Coffee, Green Mountain is solely          the other hand, Green
                    based on wholesale and does not operate any         Mountain Coffee Roasters has
                    retail or café branches. It competes against        a contract with McDonald’s
                    Peet’s in the coffee bean wholesale industry,       by selling Newman’s Own
                    and is actually more East-coast based whereas       Organic Blend coffee in more
Green Mountain      Peet’s is a West-coast company. A                   than 600 stores in the
Coffee              distinguishing feature of Green Mountain            Northeast. In general, it seems
(GMCR)              Coffee Roasters is that it is very                  that Green Mountain caters
                    environmentally friendly, contributing at least     primarily to larger
                    five percent of its pre-tax profit annually to      organizations, whereas Peet’s
                    support socially responsible initiatives. In July   is more individual-based.
                    2006, Green Mountain Coffee Roasters                Overall, it looks like the
                    launched an all-natural paper hot beverage          company has had a positive
                    cup.                                                trend in the last year, although
                                                                        in the recent three months it
                                                                        has hit peaks and dropped.
                   Tully’s is a West-coast coffee chain competing      There is definitely much
                   in essentially the same region as Peet’s that       overlap between Peets and
                   sells coffee, blends, smoothies, ice cream, and     Tully’s since both companies
                   pastries in stores. It also high quality, hand-     have strong presences on the
                   roasted premium whole bean coffees not in an        West Coast and offer similar
                   automated process. With well over 100 stores        products and services. Their
                   across the western United States and a strong       reputations and niches are
                   presence in thousands of grocery chains, it is      very similar, offering high
                   moving into new regions and new retail              quality, premium roasted
                   enterprises daily. The wholesale division sells     coffee and serving beverages
                   Tully’s coffees to customers in the                 in upscale stores. The
                   supermarket, food service, restaurant, office       company philosophies are
                   coffee service, and institutional channels; it is   very similar, and their
Tully’s Coffee
                   also responsible for mail order and Internet        commitments to offering high
(TULY)
                   sales activities.                                   quality coffee to
                                                                       supermarkets, restaurants, and
                                                                       corporations overlap. The
                                                                       competitor has certainly taken
                                                                       business away from Peets. On
                                                                       June 27, 2007, shareholders
                                                                       decided on an amendment
                                                                       that effects a one-for-eight
                                                                       reverse stock split (the
                                                                       “reverse split”) of all issued
                                                                       and outstanding shares of
                                                                       their common stock. Trends
                                                                       and figures were not available.
                   Opened its first store in 1971, currently has       Starbucks stock has
                   over 12,000 locations in the U.S, including         dramatically outperformed
                   1600 locations in 41 countries outside of the       Peet’s over the past 6 years
                   U.S. Starbucks sells over 30 types of coffee,       and the company itself has a
                   handcrafted beverages such as hot and iced          strong consumer loyalty that
                   espresso, coffee and non-coffee blended             Peet’s may have trouble
                   beverages and Tazo teas. The company also           competing with. Both
Starbucks (SBUX)
                   sells espresso machines, coffee brewers and         companies have retail outlets
                   grinders, premium chocolates, mugs and              for selling coffee and food
                   coffee accessories, baked pastries, sandwiches,     items, and both companies
                   salads, selection of music, books and film as       sell brewing equipment and
                   well as global consumer products such as their      gift cards, but Starbucks’ has a
                   line of bottled Starbucks Frappuccino drinks,       wider variety of merchandise,
                   Starbucks Discoveries coffee drinks (in Japan       with their sales of music and
                   and Taiwan), Starbucks DoubleShot espresso          specialized beverages. While
                   drinks, Starbucks Iced Coffee drinks and            Peet’s has strong customer
                   Starbucks Coffee Liqueuers and a line of            loyalty in the western US,
                         superpremium ice creams. They also sell             Starbucks brand loyalty is
                         Starbucks gift cards which surpassed the $2.5       nation-wide, and because
                         billion in activations and reloads since its        Starbucks has a much larger
                         launch in 2001.                                     number of retail outlets, it is
                                                                             likely the most challenging
                                                                             competition for Peet’s.


financials

income statement

In Millions of USD        52 weeks       52 weeks        53 weeks 52 weeks           52 weeks Ending 52 weeks
(except for per share    Ending 2006-   Ending 2006-01- Ending     Ending 2003-     2002-12-29       Ending
items)                   12-31          01              2005-01-02 12-28                             2001-12-30
 Revenue                 210.49         175.20          145.68     119.82           104.07           94.40
 Other Revenue, Total    -              -               -          -                -                -
 Total Revenue           210.49         175.20          145.68     119.82           104.07           94.40
Cost of Revenue, Total       98.93         80.84         67.81     54.96             48.15              45.36
Gross Profit                 111.56        94.36         77.88     64.86             55.93              49.04
Selling/General/Admin.
                             20.63         13.34         11.44      10.35            11.29              11.05
Expenses, Total
Research & Development       -             -             -          -                -                  -
Depreciation/Amortization    8.61          7.29          5.79       4.89             4.57               5.04
Interest Expense(Income) -
                             -             -             -          -                -                  -
Net Operating
Unusual Expense (Income)     -             -             -          3.37             0.00               -
Other Operating Expenses,
                             72.27         57.88         47.65      38.75            33.22              30.62
Total
Total Operating Expense      200.44        159.35        132.68     112.32           97.22              92.07
Operating Income             10.05         15.85         13.01      7.50             6.85               2.33
Interest Income(Expense),
                             2.46          1.77          0.92       1.16             0.54               -0.43
Net Non-Operating
Gain (Loss) on Sale of
                             -             -             -          -                -                  -
Assets
Other, Net                   -             -             -          -                -                  -
Income Before Tax            12.51         17.62         13.93      8.66             7.39               1.90
Income After Tax             7.82          10.78         8.71       5.18             4.66               1.16


Increased gross profit is clearly a positive aspect, indicating that a company is making more money
over the cost of producing the good. As we can see, Peet’s gross profit has been consistently
growing, but actually decreased from 2005 to 2006. This significant trend can be accounted for by
the fact that when revenue increases and operating income decreases, then the operating margin
decreases as well. In 2006, the decline can be attributed to a considerable increase in operating
expenses, due to the opening of new stores, higher expenses in existing stores, and the impact of
expensing stock options.

In the retail segment, operating expenses as a percent of net revenue increased by 1.9% to 42.6%
from 2005 to 2006. This is mainly because Peet’s has opened 45 new stores in the past two years,
which generally have higher operating expenses due to low sales volume. Nonetheless, net revenue
increased 19.8% compared to 2005 in the retail segment, propelled by an increase in beverage and
pastry sales.

In the past five years, Peet’s has more than doubled its gross profit. If a company’s operating margin
increases, this means it is earning more per dollar of sales. The profit margin should also be high,
which indicates the company has efficiently controlled costs that do not rise greater than the amount
it earns from selling a product.

balance sheet
                                                                             December 31,     January 1,
                                                                                 2006           2006
                                                                                            (As Restated,
                                                                                             See Note 2)
ASSETS
Current assets
     Cash and cash equivalents                                               $   7,692      $ 20,623
     Short-term marketable securities                                           19,511         32,453
     Accounts receivable, net                                                    6,838          5,152
     Inventories                                                                19,533         17,001
     Deferred income taxes—current                                               1,888          1,514
     Prepaid expenses and other                                                  3,852          3,372
           Total current assets                                                 59,314         80,115
Long-term marketable securities                                                  5,989         16,890
Property and equipment, net                                                     82,447         46,313
Deferred income taxes—non-current                                                1,315            —
Other assets, net                                                                3,940          5,434
           Total assets                                                      $ 153,005      $ 148,752
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
     Accounts payable and other accrued liabilities                          $   11,046     $    8,553
     Accrued compensation and benefits                                            6,389          5,563
     Deferred revenue                                                             4,625          3,415
            Total current liabilities                                            22,060         17,531
Deferred income taxes—non-current                                                   —            1,806
Deferred lease credits and other long-term liabilities                            3,506          2,537
            Total liabilities                                                    25,566         21,874
Shareholders’ equity
     Common stock, no par value; authorized 50,000,000 shares; issued and
        outstanding: 13,516,000 and 13,902,000 shares                                    93,246         100,562
     Accumulated other comprehensive loss, net of tax                                       (15)            (76)
     Retained earnings                                                                   34,208          26,392
           Total shareholders’ equity                                                   127,439         126,878
           Total liabilities and shareholders’ equity                                 $ 153,005       $ 148,752


Between 2005 and 2006, Peet’s assets have increased, but their current assets have significantly
decreased due to the large increase in PP&E, with cash and equivalents decreasing by 50%. Returns
on assets are inching upward to 5%, and their significant investment in PP&E may boost this in the
coming year, but in general their returns on both assets and equities have been low. However, their
current ratio remained equal to 1.

Both short-term and long-term debt increased slightly. The Debt-to-Equity Ratio has increased over
the year but achieved a low mark of .027 indicating that Peet’s is not in serious debt.


statement of cash flows
                                                                                 September 30,      October 1,
                                                                                     2007             2006
Cash flows from operating activities:
Net income                                                                        $       5,054 $         5,639
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization                                                             9,376           7,542
Amortization of interest purchased                                                          177             334
Stock-based compensation                                                                  2,116           3,357
Excess tax benefit from exercise of stock options                                        (1,279)           (709)
Tax benefit from exercise of stock options                                                1,166             756
Loss on disposition of assets and asset impairment                                          122             273
Deferred income taxes                                                                      (186)            (46)
Changes in other assets and liabilities:
Accounts receivable, net                                                                   (650)           (884)
Inventories                                                                              (8,823)         (7,038)
Prepaid expenses and other current assets                                                (3,997)         (3,036)
Other assets                                                                                 34            (312)
Accounts payable, accrued liabilities and deferred revenue                                4,027           2,622
Deferred lease credits and other long-term liabilities                                    1,394             534
Net cash provided by operating activities                                                 8,531           9,032

Cash flows from investing activities:
Purchases of property and equipment                                                     (25,804)        (17,574)
Proceeds from sales of property and equipment                                                22              28
Changes in restricted investments                                                             -          (1,969)
Proceeds from sales and maturities of marketable securities                              26,144          36,553
Purchases of marketable securities                                                (21,688)      (26,356)
Net cash used in investing activities                                             (21,326)       (9,318)

Cash flows from financing activities:
Net proceeds from issuance of common stock                                         5,885          3,345
Purchase of common stock                                                               -        (15,934)
Excess tax benefit from exercise of stock options                                  1,279            709

Net cash provided by (used in) financing activities                                7,164        (11,880)

Decrease in cash and cash equivalents                                              (5,631)   (12,166) ##
Cash and cash equivalents, beginning of period                                      7,692         20,623

Cash and cash equivalents, end of period                                   $       2,061 $        8,457

Peet’s total assets have been consistently increasing, a testament to the company’s vision of
expansion being realized. Its cash flows from investing activities have increased, although its
spending has also increased, an indication of growth in the future. From 2006 to 2007, its net
income has decreased, with a trend in increasing net cash used in investing activities. Peet’s growth is
once more reflected in the increase in purchasing property and equipment.

The increased cash flow in investments is mainly due to purchasing of new equipment and property,
since Peet’s has expanded its number of stores and continues to expand the specialty sales segment,
which requires roasting equipment. In December 2006, the Company acquired approximately
460,000 sq ft of land and a 138,000 sq ft building as a roasting facility. The net cash provided by
operating activities decreased (see income statement for explanation of operating expenses).

Starbucks, a competitor, has significantly different levels of cash flows due to its much larger size,
but one can see that its investment cash flow has greatly decreased from 2005 to 2006, contrary to
Peet’s increase in investments. The cash flow statements were not available for Green Mountain
Coffee Roasters. For Caribou coffee, the net income in cash flow has been increasing significantly
from 2000 to 5000 to over 9000 in 2006, but all its investing activities are in capital expenditures
whereas Peet’s has diversified.


valuation

In the course of the last year, the stock price of Peet's Coffee has not changed notably, starting the
year at 26.01 and closing on November 17th at 26.65, and increase of only 2.4 percent. Stock price
spiked in early August, rising from 23.36 to 28.01 when management commented that it expected
sales growth to reach the 20% range. However, prices quickly dropped back to a price of 23.70
within the next week. The stock seems to have had difficulty maintaining price since July of 2005,
when the prices peaked at 36 dollars a share. Since then, stock price has steadily fallen, despite
growth in revenue remaining at about 20% per year. Company management authorized a buyback
of equity in 2006, but has not yet acted upon this initiative. Given that the background of
management is in food chains and delivery, it seems unlikely that a focus on bolstering stock prices
is forthcoming. In addition, an evaluation, initiated by Peet’s management, to review of bonuses and
payments in the form of stock-options has revealed inaccurate accounting, requiring Peet’s to
reform its compensation policy. Litigation regarding these findings may further negatively affect
stock price. The only analysts who currently advise to buy Peet’s Coffee stock are those who have
firm trust in the management to capitalize on investments already made in expanding the chain, an
investment that has not yet yielded returns. For these reasons, the average analyst of Peet’s Coffee
stock advises a hold, on the basis of the stock being fairly valued, and unlikely to dramatically
increase in price.

Valuation Table

Metric                   P/E   EPS Prospective          P/S        P/B     Profit          Gross
                                   EPS                                     Margin          Margin
Peet’s                   51.36 .52 .44                  -32.7      -60.7   3.0%            4.2%
Starbucks                29.60 .75 .85                  -51.6      -85.5   7.3%            10.2%
Green Mountain           30.20 .99 1.08                 8.5        -65.1   3.2%            7.9%
Coffee
Caribou Coffee           -1.80   -.40    -.44           101.5      -0.6    -3.4%           -3.6%

Valuation Analysis

Compared to the competition, Peet’s Coffee appears to be trading over its value. At 51.36, the price
per earning ratio is larger than that of other companies in the same market, despite Peet’s having low
earnings per share. The current campaign being made by Peet’s Coffee management to expand the
chain into the Northeast makes the company’s relatively low gross margin acceptable, but lagging
sales and a relatively high stock price are causing Peet’s to be overvalued, or in the best case scenario,
at value.


investment opportunities

Expansion

Patrick O’Dea, CEO of Peet’s, has made expansion of the Peet’s Coffee brand into New England a
priority for the company. Currently, this initiative has been marked by the success, as many Peet’s
Coffee coffee shops have been established in the region, despite competition from Starbuck s and
Dunkin’ Donuts, which already had coffee shops established in the region. This shows that the
market is not yet saturated, and that stable franchises can be established by the company in a region
far removed from the West Coast, where the company is centered.
The main focus of expansion lies in supermarket and home roasting bagged coffee sales. Selling
bagged coffee is more profitable and requires less capital than opening and operating hundreds of
retail stores, notes O’Dea. Peet’s bagged coffee is currently available in 5,200 grocery store locations,
and an additional 3,000 locations will be added in the coming year. Thus, given its shifting focus on
grocery sales of bagged coffee, O’Dea comments that Peet’s plans to slow down shop expansion
next year, opening 30 stores (the same number it has planned for this year). With this move, Peet’s
hopes to move away from the highly competitive coffee shops and position itself as an integrand of
daily home coffee roasting, an advantageous and promising strategy.

Brand

Peet’s Coffee has a brand that is loyally ascribed to by those whom the company terms its
“Peetnicks”, original customers who frequented the store at its first Berkeley location. The
“Peetnick” identity is marketable in many areas, as it and Peet’s Coffee in general is associated with
Berkeley, alternative culture, and liberalism, concepts which may become increasingly politically
appealing to populations looking for an alternative to Peet’s competitors.

Roasting

Peet’s Coffee prides itself on artisan roasting techniques established and passed down by Alfred Peet,
the company’s founder. These roasting techniques are still highly valued by the company, which
sees high quality beans and roasting as the hallmark of the company. Discerning customers who
value the grade of their bean and the way in which it is roasted may identify with the aims of Peet’s
and preferentially patronize the company. Moreover, it is focused on carving out a niche for itself as
the highest-quality coffee sold at U.S. supermarkets. Peet’s plans to expand from the 5,200 stores in
which it currently retails to 8,200 next year. The company will operate in cities where it does not
have any coffee shops.

Industry Relationships

Alfred Peet established strong relationships with the suppliers of his coffee beans at the very start of
his career, and these relationships are maintained by current Peet’s leadership. According to the
company, these relationships shield Peet’s from the hazards of increasing costs of raw materials.

Third Quarter Report

Peet's Coffee & Tea Inc. reported that sales jumped 20 percent to $60.9 million during the its third
quarter of 2007, compared with $50.9 million during the same period last year. Earnings rose to 13
cents per share, a 24 percent increase compared with 11 cents per share during the third quarter in
2006. O'Dea comments that these results were boosted by a 23 percent growth in sales of whole
beans in grocery stores and reducing commodity-related expenses.
investment risks

Competition

Peet’s Coffee faces strong competition in the arena of specialty coffee roasting and brewing.
Starbucks Coffee provides nearly all of the services that Peet’s does, and has a tremendously strong
franchise presence, as does Dunkin’ Donuts. Moreover, the premium coffee market has expanded
to include McDonald’s as a competitor, for example, notes Deutsche Bank analyst Marc Greenberg.
The sheer number of alternatives may drive customers to choose other brands out of convenience.
It is unclear whether the Peet’s Company brand is strong enough to draw customers to Peet’s coffee
shops when so many alternatives are present.

Starbucks shares have slid 35 percent in 2007, while Peet's shares have gained 6 percent in the same
period. The Standard & Poor's Restaurants index, which both stocks are parts of, is up 4 percent this
year.

Industry Trends

The coffee industry has stagnated ever since its peak in mid 2005, and neither Peet’s Coffee nor its
competitors have achieved significant growth since then. This may be indicative of an oncoming
downward spell for the industry, as Peet’s stock and that of its competitors have largely moved
together in this motion. Peet’s current P/E ratio is around 52, compared to Green Mountain Coffee
Roaster’s 62 and Starbuck’s 26. Thus, given wide industry P/E ratio ranges, Peet’s P/E ratio falls
within those of competitors but is not pointing to a clear direction of buy/sell. Furthermore, its
2008 P/E ratio is projected to fall to 35.

Failure of Partnerships

A partnership between Peet’s Coffee and Larry’s Market – a specialty grocery chain in the Seattle
area focusing on high-quality groceries – established Peet’s Coffee shops within each Larry’s store.
Closure of Larry’s Market locations in 2006 led to the subsequent closure of the Peet’s coffee shops
within, making a small but noticeable hit to the company’s revenue. Peet’s in-store boutiques, which
provide Peet’s whole bean coffee within grocery stores, make the company similarly dependent on
the success of their partners.

investment recommendation

For these reasons, we submit a position of HOLD at the current market price on Peet’s Coffee to
the SWS Executive Board.
investment project team
Mandy Gray '09 is a junior History of Art and Architecture major with a focus in Italian Renaissance
art, who lives in Lowell house, but is originally from Eddyville, Ky. At Harvard, she is studying art
history and working toward a citation/secondary field in Italian, and also works for the Harvard
University Art Museums as an administrative assistant to the Facilities Supervisor. She hopes to go
into museum work after graduation. Mandy is interested in learning about investing because she
wants to make her money work for her, and with the uncertainty of Social Security and pensions, etc,
she feels that it is becoming very relevant. She has played the guitar for many years, enjoys soccer
and most other sports and I grew up on a farm. This summer Mandy participated in a summer
abroad study program in Abruzzo, Italy for language development, and worked for her father (who
is a civil engineer/farmer).

Katherine Grace Jonas, '08, is a senior biochemistry concentrator in Cabot House, originally from
Seattle, Washington. At Harvard, she has studied the pre-medical curriculum while completing
coursework for a public health policy minor. She also is active in women's issues on campus as co-
director of the peer-counseling group Response, and as a member of the Women in Leadership
program. She is also Co-chair of the Cabot House Committee, is head of the Cabot House
intramural crew team, and maintains a cartoon in "The Crimson". Katherine in interested in
learning more about investing because she believes that being able to earn invest money is as
important as an ability to earn it, and wants her children to be able to make career choices
independently of financial considerations. She loves music, wine, chocolate and coffee.

Jennifer Tao '11 is a freshman living Grays Middle; her concentration is undecided but she is
exploring Psychology, Econ, Statistics, and History of Art/Architecture. At Harvard, she is a
HUWIB comper, a HAUSCR comper, an intern with Cambridge Student Partnerships, a marketing
assistant and distributor at Harvard Student Agencies, and a member of the Harvard Art Society.
Jennifer is learning more about investing because she wants to be able to make her own financial
decisions and manage her money efficiently. She loves Finale desserts, Chinese painting, Leonardo
da Vinci, snowboarding, Target giftcard designs, and jellyfish. Over the past summer, Jennifer
traveled with her family on a phenomenal 6-week trip to Spain, Morocco, Portugal, France, the UK,
Ireland, Greece, and Germany.

				
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