PEETS COFFEE & TEA INC - FORM 10-Q

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EX-32.1 - EXHIBIT 32.1 - PEETS COFFEE & TEA INC	a6722079ex32_1.htm
EX-32.2 - EXHIBIT 32.2 - PEETS COFFEE & TEA INC	a6722079ex32_2.htm
EX-31.1 - EXHIBIT 31.1 - PEETS COFFEE & TEA INC	a6722079ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - PEETS COFFEE & TEA INC	a6722079ex31_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 3, 2011

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________to __________________

Commission file number: 0-32233

PEET’S COFFEE & TEA, INC.

(Exact Name of Registrant as Specified in Its Charter)

Washington		91-0863396
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1400 Park Avenue

Emeryville, California 94608-3520

(Address of Principal Executive Offices)(Zip Code)

(510) 594-2100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large Accelerated Filer o	Accelerated Filer x
Non-Accelerated Filer o	Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No x

As of May 8, 2011, 12,817,670 shares of registrant’s Common Stock were outstanding.

	INDEX	Page

PART I	FINANCIAL INFORMATION

Item 1.	Unaudited Condensed Consolidated Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	18
Item 4.	Controls and Procedures	19

PART II	OTHER INFORMATION

Item 1.	Legal Proceedings	19
Item 1A.	Risk Factors	19
Item 2.	Unregistered Sales of Equity Securities and use of Proceeds	20

Item 6.	Exhibits	20
	Signatures	22

PART I – FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share amounts)

	April 3,		January 2,
	2011		2011

ASSETS

Current assets
Cash and cash equivalents	$	34,859	$	44,629
Short-term marketable securities		8,202		4,183
Accounts receivable, net		16,418		14,852
Inventories		31,253		33,534
Deferred income taxes - current		4,379		4,420
Prepaid expenses and other		7,828		7,798
Total current assets		102,939		109,416

Long-term marketable securities		529		-
Property, plant and equipment, net		94,252		97,279
Other assets, net		1,336		2,137

Total assets	$	199,056	$	208,832

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities
Accounts payable and other accrued liabilities	$	9,609	$	9,138
Accrued compensation and benefits		6,576		11,555
Deferred revenue		6,112		7,102
Total current liabilities		22,297		27,795

Deferred income taxes - non current		73		46
Deferred lease credits		6,911		7,023
Other long-term liabilities		1,144		1,468
Total liabilities		30,425		36,332

Shareholders' equity
Common stock, no par value; authorized 50,000,000 shares;
issued and outstanding:12,981,000 and 13,063,000 shares		72,608		81,995
Accumulated other comprehensive income		7		2
Retained earnings		96,016		90,503

Total shareholders' equity		168,631		172,500

Total liabilities and shareholders' equity	$	199,056	$	208,832

See notes to condensed consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands, except per share amounts)

	Thirteen weeks ended
	April 3,		April 4,
	2011		2010

Retail stores	$	52,089	$	50,071
Specialty sales		36,383		31,125
Net revenue		88,472		81,196

Cost of sales and related occupancy expenses		41,220		37,539
Operating expenses		27,884		27,837
Transaction related expenses		-		824
General and administrative expenses		6,809		6,302
Depreciation and amortization expenses		3,919		3,877
Total costs and expenses from operations		79,832		76,379

Income from operations		8,640		4,817

Interest income, net		11		(1	)

Income before income taxes		8,651		4,816

Income tax provision		3,138		1,765

Net income	$	5,513	$	3,051

Net income per share:
Basic	$	0.42	$	0.23
Diluted	$	0.41	$	0.22

Shares used in calculation of net income per share:
Basic		13,109		13,188
Diluted		13,520		13,809

See notes to condensed consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)


	Thirteen weeks ended
	April 3,			April 4,
	2011			2010

Cash flows from operating activities:
Net income	$	5,513		$	3,051
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		4,501			4,422
Amortization of interest purchased		83			-
Stock-based compensation		906			742
Excess tax benefit from exercise of stock options		(3,508	)		(1,113	)
Tax benefit from exercise of stock options		3,221			946
Loss on disposition of assets and asset impairment		126			31
Deferred income taxes		68			(5	)
Changes in other assets and liabilities:
Accounts receivable, net		(1,566	)		2,670
Inventories		2,281			1,697
Prepaid expenses and other current assets		(30	)		(618	)
Other assets		(1	)		29
Accounts payable, accrued liabilities and deferred revenue		(5,273	)		(7,354	)
Deferred lease credits and other long-term liabilities		(436	)		125
Net cash provided by operating activities		5,885			4,623

Cash flows from investing activities:
Purchases of property, plant and equipment		(1,821	)		(2,623	)
Proceeds from sales of property, plant and equipment		-			13
Changes in restricted investments		798			560
Proceeds from sales and maturities of marketable securities		703			-
Purchases of marketable securities		(5,329	)		-
Net cash used in investing activities		(5,649	)		(2,050	)

Cash flows from financing activities:
Net proceeds from issuance of common stock		7,730			4,732
Purchase of common stock		(21,244	)		(528	)
Excess tax benefit from exercise of stock options		3,508			1,113
Net cash (used in)/provided by financing activities		(10,006	)		5,317

(Decrease) increase in cash and cash equivalents		(9,770	)		7,890
Cash and cash equivalents, beginning of period		44,629			47,934

Cash and cash equivalents, end of period	$	34,859		$	55,824

Non-cash investing activities:
Capital expenditures incurred, but not yet paid	$	187		$	118
Other cash flow information:
Cash paid for income taxes		181			91

See notes to condensed consolidated financial statements.

Peet’s Coffee & Tea, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.	Basis of Presentation

The accompanying condensed consolidated financial statements of Peet’s Coffee & Tea, Inc. and its subsidiaries (collectively, the “Company” or “Peet’s”) as of April 3, 2011 and for the thirteen weeks ended April 3, 2011 and April 4, 2010 are unaudited and, in the opinion of management, contain all adjustments, consisting only of normal recurring items necessary to present fairly the financial position and results of operations for such periods. The information included in this Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the Company’s annual consolidated financial statements in Peet’s Annual Report on Form 10-K for the year ended January 2, 2011 (the “2010 Form 10-K”).

The results of operations for the thirteen weeks ended April 3, 2011 are not necessarily indicative of the results expected for the full year.

Comprehensive Income

For the thirteen weeks ended April 3, 2011 and April 4, 2010, comprehensive income was $5,518,000 and $3,051,000, respectively. Comprehensive income consists of net income and net unrealized gains and losses on investments.

Net Income per Share

Basic net income per share is computed as net income divided by the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the potential dilution that could occur from common shares issued through stock options. Anti-dilutive shares of 174,467 and 47,469 have been excluded from diluted weighted average shares outstanding for the thirteen week periods ended April 3, 2011 and April 4, 2010, respectively.

The number of incremental shares from the assumed exercise of stock options was calculated by applying the treasury stock method. The following table summarizes the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted net income per share (in thousands):

	Thirteen weeks
	April 3,		April 4,
	2011		2010


Basic weighted average shares outstanding		13,109		13,188
Incremental shares from assumed
exercise of stock options and awards		412		621
Diluted weighted average shares outstanding		13,520		13,809

2.	Fair Value Measurements

Accounting Standards Update (“ASC”) 820, “Fair Value Measurements and Disclosures,” defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.

Level 3 - Unobservable inputs that are supported by little or no market activity, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing.

Recurring Fair Value Measurements

In accordance with accounting principles generally accepted in the United States, certain assets and liabilities are required to be recorded at fair value on a recurring basis. The Company has the following assets that are adjusted to fair value on a recurring basis.

Marketable securities

The fair values of our investments in our marketable securities were determined using quoted market prices from daily exchange traded markets. The fair values of these instruments were based on the closing price as of the balance sheet date and were classified as Level 1. The Company’s marketable securities consist of U.S. government, agency, municipal and equity securities classified as follows (in thousands):

	April 3,		January 2,
	2011		2011


Short-term	$	8,202	$	4,183
Long-term		529		-
Total	$	8,731	$	4,183

Unrealized gains or losses on marketable securities are recorded in accumulated other comprehensive income at each measurement date.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures certain non-financial assets and liabilities, including long-lived assets, at fair value on a non-recurring basis. For the period ended April 3, 2011, the Company recorded a charge of $97,000 related to the impairment of assets at an under-performing store. For the period ended April 4, 2010 the Company was not required to measure any non-financial assets and liabilities at fair value. The fair market value of these assets was determined using the income approach and Level 3 inputs, which required management to make estimates about future cash flows. Management estimates the amount and timing of future cash flows based on its experience and knowledge of the retail market in which each store operates and other factors. This impairment charge is included in operating expenses in the accompanying condensed consolidated statements of income.

The carrying value of cash and equivalents, restricted cash, receivables and accounts payable approximates fair value.

3.	Inventories

The Company’s inventories consist of the following (in thousands):

	April 3,		January 2,
	2011		2011

Green coffee	$	21,002	$	23,200
Other inventory		10,251		10,334
Total	$	31,253	$	33,534

4.	Stock Purchase Program

On September 2, 2010, the Board of Directors authorized the Company to purchase up to one million additional shares of the Company’s common stock. During the thirteen weeks ended April 3, 2011, the Company purchased 503,295 shares of common stock, at an average price of $42.21, in accordance with this stock purchase program. 302,156 shares remain available for purchase under this stock purchase program.

Purchases under the Company’s stock purchase programs may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.

5.	Stock-Based Compensation

On May 18, 2010, the Company’s shareholders approved the Peet’s Coffee & Tea, Inc. 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan is intended as the successor to and continuation of the Peet’s Coffee & Tea, Inc. 2000 Equity Incentive Plan (“Prior Plan”). Under the 2010 Plan, the Company may grant incentive stock options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards (“RSUs”), performance stock awards, performance cash awards, and other stock awards. The aggregate number of shares of common stock that may be issued pursuant to stock awards from and after May 18, 2010 shall not exceed 700,000 shares plus shares underlying options under the Prior Plan that expire or terminate, less one share for each share of stock issued pursuant to an option or stock appreciation right under the Prior Plan after January 3, 2010 and 1.8 shares for each share of stock issued pursuant to a restricted stock award, restricted stock unit award (“RSUs”), performance stock award, performance cash award, or other stock award.

Stock Option Activity

Changes in stock options were as follows:

						Weighted Average		Aggregate
				Weighted Average		Remaining		Intrinsic
	Options			Exercise Price		Contractual		Value
	Outstanding			Per Share		Life (Years)		(in thousands)

Outstanding at January 2, 2011		2,018,690		$	24.87		5.63	$	34,050
Granted		3,800			42.21
Canceled		(20,210	)		26.42
Exercised		(411,362	)		17.91
Outstanding at April 3, 2011		1,590,918		$	26.69		6.20	$	33,785
Vested or expected to vest, April 3, 2011		1,526,292		$	26.50		6.12	$	32,705
Exercisable at April 3, 2011		861,145		$	24.11		4.85	$	20,510

Restricted Stock Unit Awards

During the second quarter of 2010, the Company began granting RSUs under the 2010 Plan. RSUs vest according to a pre-determined vest schedule set at the grant date.

Changes in RSU’s were as follows:

	Number of			Weighted Average
	Units			Grant Date
	Outstanding			Fair Value

Outstanding at January 2, 2011		24,901		$	37.14
Granted		-			-
Vested		-			-
Forfeited, cancelled or expired		(1,013	)		37.12
Outstanding at April 3, 2011		23,888		$	37.14

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”) under which eligible employees can choose to have up to 15% of their annual earnings withheld to purchase the Company’s common stock. The price of stock purchased under the ESPP is 85% of the lower of the market prices at the beginning of the offering period and the end of the offering period market price. The Company initially reserved 200,000 shares of common stock for issuance under the ESPP, which is subject to increase as of each annual meeting of the Company’s shareholders, until 2020, by the lesser of 200,000 shares or 1.5% of the number of shares of common stock outstanding on the date of such annual meeting. However, the Board of Directors has the authority to increase the ESPP reserve by a smaller number of shares of common stock on each such date. During the thirteen week period ended April 3, 2011, 10,428 shares of the Company’s common stock were purchased under the ESPP. At April 3, 2011, 1,436,792 shares remain available for future issuance under the ESPP.

Stock-Based Compensation

Stock-based compensation expense consists of and was recognized in the condensed consolidated statements of income as follows (in thousands):

	Thirteen weeks ended
	April 3,		April 4,
	2011		2010

Stock-based compensation expense	$	810	$	742
Employee Stock Purchase Plan expense		96		-
Total	$	906	$	742

Cost of sales and related occupancy expenses	$	129	$	74
Operating expenses		303		282
General and administrative expenses		474		386
Total	$	906	$	742

Tax benefit	$	369	$	302

The fair value of each RSU is equal to the stock price on the date of grant. The fair value of each option grant and Employee Stock Purchase Plan award is estimated on the date of grant using the Black-Scholes-Merton option-pricing model with the following assumptions:

	April 3,			April 4,
	2011			2010
Expected term in years		6.0			6.1
Expected stock price volatility		36.0	%		37.8	%
Risk-free interest rate		2.3	%		2.5	%
Expected dividend yield		0.0	%		0.0	%

Estimated fair value per option granted	$	16.37		$	13.72
Estimated fair value per RSU awarded	$	-		$	-

6.	Line of Credit

On December 21, 2010, the Company entered into a credit agreement with Wells Fargo Bank, National Association (the “Bank”). The credit agreement provides for a $50 million revolving line of credit, the proceeds of which may be used for general corporate purposes, including funding working capital, capital expenditures, share repurchases and other needs. The line of credit has a maturity date of December 1, 2013. This credit agreement replaces the Company’s agreement with the Bank that matured on December 1, 2010 and under which there were no borrowings.

The Company’s obligations under the line of credit are unconditionally guaranteed by Peet’s Operating Company, Inc. in the principal amount up to $50 million. The line of credit has a maturity date of December 1, 2013.

During the thirteen weeks ended April 3, 2011 and as of April 3, 2011, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $50.0 million as of April 3, 2011.

7.	Legal Proceedings

On February 23, 2010, a complaint was filed in Orange County Superior Court by two former employees, on behalf of themselves and all other non-exempt employees similarly situated in the state of California naming the Company as a defendant. One of the plaintiffs was removed by an amended complaint and the remaining plaintiff alleges claims for unpaid overtime, unpaid meal and rest period premiums, unpaid business expenses, unpaid minimum wages, untimely wages paid at time of termination, untimely payment of wages, failure to pay vacation wages, violation of California Business & Professions Code section 17200 and non-compliant wage statements and seeks injunctive relief, restitution, monetary damages, penalties under the California Labor Code Private Attorneys General Act, costs and attorneys’ fees, penalties, and prejudgment interest. At this time, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from this proceeding. The Company has previously settled two employment related lawsuits certified as a class: 1) a $2.5 million settlement in 2010 for a complaint filed by three former employees on behalf of themselves and all other California store managers alleging they were not paid overtime wages, were not provided meal or rest periods, were not provided accurate wage statements and were not reimbursed for business expenses, and 2) a $2.1 million final settlement payment in 2004 of another class action lawsuit.

On February 2, 2010, the Council for Education and Research on Toxics (“CERT”), a public interest group, issued a series of pre-litigation notices of intent to sue a number of companies, including the Company, which sell “ready to drink” coffee in California for allegedly failing to issue clear and reasonable warnings with regard to potential exposures to acrylamide in accordance with California Health and Safety Code section 25249.6 (“Proposition 65”). The Company was among a number of companies named in an action filed in California Superior Court, Los Angeles County, on August 7, 2010. On December 14, 2010, CERT served a new 60-day notice letter to the Company and other companies alleging additional violations of Proposition 65 arising from potential acrylamide exposures from coffee sold at retail and brewed and consumed elsewhere. The Company was among a number of companies named in an action filed in California Superior Court, Los Angeles County, on May 9, 2011. The Company intends to vigorously defend against these claims. As these matters are at a very early stage, at this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to these matters.

The Company is involved in various other litigation and governmental proceedings, not described above, that have arisen in the normal course of business. While it is not possible to determine with certainty the ultimate outcome or the duration of any such litigation or governmental proceedings, the Company believes, based on current knowledge and the advice of counsel, that such litigation and proceedings will not have a material impact on the Company’s consolidated financial position or results of operations.

8.	Segment Information

The Company operates in two reportable segments: retail and specialty sales. Retail store operations consist of sales of whole bean coffee, beverages, tea and related products through Company-operated retail stores. Specialty sales consist of whole bean coffee sales through three operating segments: grocery, home delivery, foodservice and office.

Management evaluates segment performance primarily based on revenue and segment operating income. The following table presents certain financial information for each segment. Segment income before taxes excludes unallocated marketing expenses and general and administrative expenses. Unallocated assets include cash, coffee inventory in the warehouse, corporate headquarter assets and intangible and other assets (dollars in thousands).

	Retail					Specialty					Unallocated			Total
			Percent					Percent								Percent
			of Net					of Net								of Net
	Amount		Revenue			Amount		Revenue						Amount		Revenue

For the thirteen weeks ended April 3, 2011
Net revenue	$	52,089		100.0	%	$	36,383		100.0	%				$	88,472		100.0	%
Cost of sales and occupancy		22,244		42.7	%		18,976		52.2	%					41,220		46.6	%
Operating expenses		20,479		39.3	%		7,405		20.4	%					27,884		31.5	%
Depreciation and amortization		2,737		5.3	%		444		1.2	%	$	738			3,919		4.4	%
Segment operating income		6,629		12.7	%		9,558		26.3	%		(7,547	)		8,640		9.8	%
Total assets		49,206					21,247					128,603			199,056
Capital expenditures		672					688					461			1,821

For the thirteen weeks ended April 4, 2010
Net revenue	$	50,071		100.0	%	$	31,125		100.0	%				$	81,196		100.0	%
Cost of sales and occupancy		21,654		43.2	%		15,885		51.0	%					37,539		46.2	%
Operating expenses		21,130		42.2	%		6,707		21.5	%					27,837		34.3	%
Depreciation and amortization		2,749		5.5	%		432		1.4	%	$	696			3,877		4.8	%
Segment operating income		4,538		9.1	%		8,101		26.0	%		(7,822	)		4,817		5.9	%
Total assets		54,027					17,720					134,727			206,474
Capital expenditures		1,519					191					913			2,623

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements and related notes included elsewhere in this report. Except for historical information, the discussion in this report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, you can identify forward-looking statements by terminology, such as “may,” “should,” “could,” “predict,” “potential,” “continue,” “expect,” “anticipate,” “future,” “plan,” “believe,” “estimate” and similar expressions (or the negative of such expressions). The forward-looking statements in this Form 10-Q include, but are not limited to, statements regarding our expectations for the growth of the specialty coffee industry; our expectations regarding green coffee prices and the coffee commodity market; our plans to open new retail stores; our plans to expand into new grocery markets; our expectations regarding the outcome and/or impact of legal proceedings to which we are a party; our expectations regarding the availability of a line of credit; and our expectations for future revenue, margins, expenses, unrecognized tax benefits, operating results, inventory levels and capital expenditures. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks, uncertainties and other important factors. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Important factors that could cause actual results to differ materially include, but are not limited to, the following:

●

Coffee costs have increased significantly over the past year and increases in the cost of high-quality Arabica coffee beans could impact the profitability of our business. As discussed under “Company Overview and Industry Outlook” below and in the revised risk factor set forth in Part II, Item 1A of this Form 10-Q, in the second half of 2010 and first quarter of 2011, we have experienced a dramatic rise in green coffee costs, which could adversely impact our margins and profitability.

●

The recent recession or a worsening of the United States and global economy could materially adversely affect our business. Our revenues and performance depend significantly on consumer confidence and spending, which have deteriorated due to the recession and may remain depressed for the foreseeable future. Some of the factors that could influence the levels of consumer confidence and spending include, without limitation, continuing conditions in the residential real estate and mortgage markets, access to credit, labor and healthcare costs, increases in fuel and other energy costs, elevated unemployment levels and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and operating results. Because our business is based primarily in California, a worsening of economic conditions, a decrease in consumer spending or a change in the competitive conditions in this market may substantially decrease our revenue and may adversely impact our ability to implement our business strategy. We expect that our California operations will continue to generate a substantial portion of our revenue. In addition, our California retail stores provide us with means for increasing brand awareness, building customer loyalty and creating a premium specialty coffee brand. As a result, if the current economic downturn and decrease in consumer spending in California continues or worsens, it may not only lead to a substantial decrease in revenue, but may also adversely impact our ability to market our brand, build customer loyalty, or otherwise implement our business strategy.

●

A significant interruption in the operation of our roasting and distribution facility could potentially disrupt our operations. We have only one roasting and distribution facility that roasts Peet’s coffee. A significant interruption in the operation of our roasting and distribution facility, whether as a result of a natural disaster, pandemic or other causes, could significantly impair our ability to operate our business. Since we only roast our coffee to order, we do not carry inventory of roasted coffee in our roasting plant. Therefore, a disruption in service in our roasting facility would impact our sales in our retail and specialty channels almost immediately. Moreover, our roasting and distribution facility and most of our stores are located near several major earthquake faults and our roastery is located directly on the bay in Alameda. The impact of a major earthquake or tsunami on our facilities, infrastructure and overall operations is difficult to predict and an earthquake or tsunami could seriously disrupt our entire business.

●

Complaints or claims by current, former or prospective employees or governmental agencies could adversely affect us. We are subject to a variety of laws and regulations which govern such matters as minimum wages, overtime and other working conditions, meal and rest periods, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have been, and in the future may be, the subject of complaints or litigation from current, former or prospective employees or governmental agencies. In addition, successful complaints against our competitors may spur similar lawsuits against us. For instance, in 2003, two lawsuits (which have since been settled) were filed against us alleging misclassification of employment position and sought damages, restitution, reclassification and attorneys’ fees and costs. In 2008, a lawsuit (which has since been settled) was filed alleging that store managers based in California were not paid overtime wages, were not provided meal or rest periods, were not provided accurate wage statements and were not reimbursed for business expenses. In addition, on February 23, 2010, a complaint was filed by non-exempt employees on their own behalf and on behalf of employees similarly situated alleging claims for unpaid overtime, unpaid meal and rest period premiums, unpaid business expenses, unpaid minimum wages, untimely wages paid at time of termination, untimely payment of wages, failure to pay vacation wages and non-compliant wage statements. These types of claims and litigation involving current, former or prospective employees could divert our management’s time and attention from our business operations and might result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations in one or more fiscal periods.

For a discussion of additional material risks and uncertainties that we face, see the discussion in the 2010 Form 10-K titled “Risk Factors.”

Company Overview and Industry Outlook

Peet’s is a specialty coffee roaster and marketer of fresh, deep-roasted whole bean coffee and tea sold through multiple channels of distribution for home and away-from-home enjoyment. Founded in Berkeley, California in 1966, Peet's has established a loyal customer base with strong brand awareness in California. Our growth strategy is based on the sale of whole bean coffee, tea and high-quality beverages in multiple channels of distribution including our own retail stores, grocery, home delivery, and foodservice and office accounts throughout the United States.

We expect the specialty coffee industry, fueled by continued consumer interest in high-quality coffee and related products, to continue to grow. We believe that growth opportunities exist in all of our distribution channels and that our specialty segment can expand to geographies where we do not have a retail presence. Our first priority has been to develop primarily in the western U.S. markets where we already have a presence and higher customer awareness. In the long-term, we expect to continue to open new retail stores in strategic west coast locations that meet our demographic profile. In grocery, we expect to continue to expand into new markets in addition to the western U.S., eastern seaboard and other selected markets, although the full extent of our penetration will depend upon the growth of the specialty coffee category in those markets. We expect to continue to partner with distributors and companies to expand our presence in the foodservice and office environment.

Coffee cost is our second largest cost line item after personnel costs and in 2010 represented approximately 15% of our net revenue. In order to manage coffee costs we purchase and hold large quantities of inventory and use future fixed price purchase commitments. As of May 6, 2011, between our ending inventory and our fixed price commitments, we had approximately 32 million pounds of coffee at fixed prices for use in 2011 and 2012, of which we estimate approximately 6 million pounds will be available for 2012. Our requirements for green coffee for the year are expected to be approximately 28-30 million pounds. Since the coffee we purchase comes from over 20 different countries and includes 28 different types of coffee (including 12 single origin coffees), these coffees are not necessarily interchangeable or substitutable and therefore the covered needs of specific origin coffees varies due to differing growing seasons and origin specific situations.

Given the concentration of coffee in our cost structure, if coffee costs do not decline and we are unable to pass along increased coffee costs to our customers through price increases, our margin and profitability may decrease. We expect to continue to monitor these markets and take actions we feel are appropriate to minimize the impact on us in the short and long-term.

Results of Operations

The following discussion on results of operations should be read in conjunction with the condensed consolidated financial statements and accompanying notes and the other financial data included elsewhere in this report.

	Thirteen weeks ended
	April 3,			April 4,
	2011			2010

Statement of income as a percent of net revenue:
Net revenue		100.0	%		100.0	%
Cost of sales and related occupancy expenses		46.6			46.2
Operating expenses		31.5			34.3
Transaction related expenses		-			1.0
General and administrative expenses		7.7			7.8
Depreciation and amortization expenses		4.4			4.8
Income from operations		9.8			5.9
Interest income		-			-
Income before income taxes		9.8			5.9
Income tax provision		3.5			2.2
Net income		6.2	%		3.8	%

Percent of net revenue by business segment:
Retail stores		58.9	%		61.7	%
Specialty sales		41.1			38.3

Percent of net revenue by business category:
Whole bean coffee and related products		57.3	%		55.4	%
Beverages and pastries		42.7			44.6

Cost of sales and related occupancy expenses as a percent of segment revenue:
Retail stores		42.7	%		43.2	%
Specialty sales		52.2			51.0

Operating expenses as a percent of segment revenue:
Retail stores		39.3	%		42.2	%
Specialty sales		20.4			21.5

Percent increase from prior year:
Net Revenue		9.0	%		12.6	%
Retail stores		4.0			4.4
Specialty sales		16.9			29.0
Cost of sales and related occupancy expenses		9.8			15.3
Operating expenses		0.2			10.6
General and administrative expenses		8.0			6.1
Depreciation and amortization expenses		1.1			7.5

Selected operating data:
Number of retail stores in operation
Beginning of the period		192			192
Store openings		1			1
Store closures		-			-
End of the period		193			193

Thirteen Weeks Ended April 3, 2011 Compared to Thirteen Weeks Ended April 4, 2010

Net revenue

Net revenue for the thirteen weeks ended April 3, 2011 increased $7.3 million, or 9.0%, compared to the corresponding period in 2010. Sales of whole bean and related products increased 12.9% to $50.7 million. Net revenue from beverages and pastries increased 4.1% to $37.7 million.

In the retail segment, net revenue increased $2.0 million, or 4.0%, compared to the corresponding period in 2010 driven by growth in both beverage and pastries sales and whole bean coffee and related sales. Sales of beverages and pastries in the retail segment increased by 4.3% to $37.7 million and sales of whole bean coffee and related products increased by 3.4% to $14.3 million. The beverage and pastries sales increase was due primarily to price increases in the third quarter of 2010 and, to a lesser extent, increases in retail store traffic. Whole bean coffee sales also benefited from price increase, offset partially by the continuing cannibalization of bean sales in retail stores by sales levels of Peet’s coffee in grocery stores.

In the specialty sales segment, net revenue increased $5.3 million, or 16.9%, compared to the first quarter of 2010, as summarized by business channel below. The growth in net revenue in grocery was due primarily to increased sales in existing markets. Net revenue in foodservice and office coffee sales increased primarily due to new accounts added over the last 12 months. Net revenue in the home delivery channel increased largely due to price increases in the fourth quarter of 2010.

	Thirteen weeks ended
(dollars in thousands)	April 3, 2011		April 4, 2010		Increase
Grocery	$	22,794	$	18,643	$	4,151	22.3	%
Foodservice and office		9,433		8,480		953	11.2	%
Home delivery		4,156		4,002		154	3.8	%
Total specialty	$	36,383	$	31,125	$	5,258	16.9	%

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales increased from 46.2% in the first quarter of 2010 to 46.6% in the first quarter of 2011. The increase from last year was due primarily to higher coffee costs and a shift in revenue mix towards the grocery channel where we have lower gross margins than our retail business, partially offset by the impact of price increases.

In the retail segment, cost of sales and related occupancy expenses as a percent of net revenue decreased 0.5% as the impact of a price increase in the third quarter of 2010 was partially offset by higher coffee costs.

In the specialty segment, cost of sales and related occupancy expenses as a percent of net revenue increased 1.2% as the impact of higher coffee costs outweighed the impact of a price increase in the first quarter 2011.

For the remainder of the year, we expect cost of sales and related occupancy expenses as a percent of revenue to be substantially above last year levels, due to higher coffee costs.

Operating expenses

Operating expenses consist of both retail and specialty segment operating costs, such as employee labor and benefits, sales commissions, repairs and maintenance, supplies, training, travel, banking and card processing fees. Operating expenses as a percentage of net revenue decreased 2.8% to 31.5% partially due to the revenue mix shift from the retail segment towards the specialty segment, which has lower operating costs.

In the retail segment, operating expenses as a percent of net revenue decreased 2.9% primarily due to lower training expenses in retail stores, the impact of a price increase, lower repairs and maintenance expense, and leverage of overhead costs.

In the specialty segment, operating expenses as a percent of net revenue decreased 1.1% primarily due to leverage of payroll and overhead expenses and other operating cost savings.

We expect operating expenses as a percent of net revenue in 2011 to continue to improve primarily due to the continued revenue mix shift in business towards the specialty segment and leverage of retail overhead.

Transaction related expenses

Transaction related expenses in 2010 include legal and related fees to comply with a subpoena the company received from the Federal Trade Commission in connection with its anti-trust review of the proposed Green Mountain Coffee Roasters acquisition of Diedrich Coffee. We did not recognize any transaction related expenses during the first quarter of 2011.

General and administrative expenses

General and administrative expenses increased to $6.8 million compared to $6.3 million for the corresponding period last year primarily due to higher marketing costs and compensation expenses.

Depreciation and amortization expense

Depreciation and amortization expense was consistent with the corresponding period last year.

Interest income, net

We invest in U.S. government, agency, municipal and equity securities. Interest income includes interest income and gains or losses from the sale of these instruments. Interest income was higher compared to the corresponding period last year due to interest expense on lower balances in our deferred compensation plan.

Income tax provision

The effective income tax rate for the first quarter of 2011 is 36.3% compared to 36.6% during the first quarter of 2010 due to normal quarter to quarter rate fluctuations.

The Company does not expect unrecognized tax benefits to change significantly within the next 12 months.

Liquidity and Capital Resources

At April 3, 2011 we had $34.9 million in cash and cash equivalents. Working capital was $80.6 million as of April 3, 2011.

Net cash provided by operating activities was $5.9 million for the thirteen weeks ended April 3, 2011 compared to $4.6 million for the same prior year period. Operating cash flows were higher than the prior year period primarily due to higher net income and other changes in working capital.

Net cash used in investing activities was $5.6 million for the thirteen weeks ended April 3, 2011 compared to $2.1 million in the prior year period. Investing activities primarily relate to purchases of property, plant and equipment and maturities and purchases of marketable securities. During the thirteen week period ended April 3, 2011, we purchased property, plant and equipment totaling $1.8 million consisting of improvements and equipment for one new store, improvements to existing stores, equipment for our grocery and food-service operations, and information technology software and hardware. During the thirteen week period ended April 3, 2011, we purchased $5.3 million of marketable securities, received proceeds from maturities of marketable securities totaling $0.7 million, and received proceeds from the release of restricted investments totaling $0.8 million.

Net cash used by financing activities for the thirteen weeks ended April 3, 2011 was $10.0 million compared to net cash provided by financing activities of $5.3 million for the same prior year period. Financing activities primarily relate to repurchases of our common stock totaling $21.2 million, offset by proceeds from stock option exercises of $7.7 million.

The Company also has $50.0 million available through a credit agreement entered into on December 21, 2010 with Wells Fargo Bank, National Association, the proceeds of which may be used in the general course of business, including to fund working capital, capital expenditures, share repurchases and other needs of the Company.

The Company’s obligations under the line of credit are guaranteed by the Company’s wholly-owned subsidiary, Peet’s Operating Company, and secured by substantially all of the Company’s and Peet’s Operating Company’s personal property. The line of credit has a maturity date of December 1, 2013. The Company’s obligations under the line of credit are unconditionally guaranteed by Peet’s Operating Company, Inc. in the principal amount up to $50 million.

Amounts drawn under the credit agreement will bear interest (computed on the basis of a 360-day year, actual days elapsed) either (i) at a fluctuating rate, determined on a daily basis, per annum of the Daily One-Month LIBOR Spread above the rate of interest equal to LIBOR then in effect for delivery for a 1 month period, or (ii) at a fixed rate per annum of the Fixed LIBOR spread above LIBOR in effect on the first day of the applicable period commencing on a business day and continuing for 1, 3, or 6 months, as designated by the Company. The Daily One-Month and Fixed LIBOR spreads are based upon the Company’s leverage ratio calculated for the most recent quarter as follows:

Leverage Ratio	Daily One-Month LIBOR or Fixed LIBOR Spread

Greater than 2.00 to 1.00	1.50 %
Less than or equal to 2.00 to 1.00	1.00 %

The credit agreement contains customary affirmative and negative covenants. The credit agreement also includes financial covenants that require the Company to maintain a specified leverage ratio and a minimum amount of net income. The credit agreement includes customary events of default that permit the Bank to accelerate the Company’s outstanding obligations, including nonpayment of principal, interest, fees or other amounts, violation of covenants, failure to make any payments when due with respect to certain other debt or certain failures to comply with the terms of such other debt, entry of certain judgments, inaccuracy of representations and warranties, occurrence of any event or condition that has a material adverse effect, and upon the occurrence of bankruptcy and other insolvency events and certain events relating to a dissolution or liquidation of the Company or Peet’s Operating Company, Inc.

During the quarter ended and as of April 3, 2011, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $50.0 million as of April 3, 2011. As of April 3, 2011, we were in compliance with these financial covenants.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We invest excess cash in equity securities and interest-bearing, U.S. government, agency, and municipal securities. These financial instruments are subject to stock market volatility and fluctuations of daily interest rates. Therefore our investment portfolio is exposed to market risk from these changes.

The supply and price of coffee are subject to significant volatility and can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide.

We currently use fixed-price purchase commitments, but in the past have used and may potentially in the future use coffee futures and coffee futures options to manage coffee supply and price risk.

Fixed-Price and Not-Yet-Priced Purchase Commitments

We enter into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and fix our cost of green coffee beans. These commitments are made with established coffee brokers and are denominated in U.S. dollars. We also enter into “not-yet-priced” commitments based on a fixed premium over the New York “C” market with the option to fix the price at any time. As of April 3, 2011, we had approximately $37.3 million in open fixed-priced purchase commitments and approximately $23.9 million in not-yet-priced commitments for a total of approximately $61.2 million with delivery dates ranging from April 2011 through June 2012. Although in the current market environment we have experienced some non-delivery on commitments, they have not been significant relative to our overall purchases. We believe, based on relationships established with our suppliers, that the risk of non-delivery on such purchase commitments is low.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of April 3, 2011, the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the quarter covered by this report at the reasonable-assurance level.

There have been no changes in our internal controls over financial reporting during the fiscal quarter ended April 3, 2011 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Information set forth in Note 7, “Legal Proceedings,” of the Notes to Unaudited Condensed Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q is incorporated herein by reference.

Item 1A. Risk Factors

The following risk factor has been updated from the disclosure provided in the 2010 Form 10-K:

Coffee costs have increased significantly over the past year and increases in the cost of high-quality Arabica coffee beans could impact the profitability of our business.

In the second half of 2010 and first quarter of 2011, we have experienced a dramatic rise in the costs of Arabica coffee traded on New York Board of Trade. In May 2011, coffee commodity prices reached a 34-year high at a level approximately 50% higher than they were six months earlier and over 120% higher than they were a year earlier. While we do not purchase coffee on the commodity markets, price movements in the commodity trading of Arabic coffee beans impact the prices we pay. We expect the coffee commodity market to continue to be challenging as the market continues to be influenced by worldwide demand, the weakness of the dollar, speculative trading and weather and as Brazil – the largest coffee producing country – enters a cyclically low production year in its biennial crop cycle. We typically fix the price of our coffee needs for the next six to 18 months by purchasing and holding large inventories of green coffee and utilizing future fixed price purchase commitments. As of May 6, 2011, between our ending inventory and our fixed price commitments, we had approximately 32 million pounds of coffee at fixed prices for use in 2011 and 2012, of which we estimate approximately 6 million pounds will be available for 2012. Our requirements for green coffee for the year are expected to be approximately 28-30 million pounds. Since the coffee we purchase comes from over 20 different countries and includes 28 different types of coffee (including 12 single origin coffees), these coffees are not necessarily interchangeable or substitutable and therefore the covered needs of specific origin coffees varies due to differing growing seasons and origin specific situations. Given the concentration of coffee in our cost structure, if coffee costs do not decline and we are unable to pass along increased coffee costs to our customers through price increases, our margin and profitability may decrease. We expect to continue to monitor these markets and take actions we feel are appropriate to minimize the impact on us in the short and long-term.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Information regarding purchases of the Company’s securities by or on behalf of the Company is set forth in the table below.

Repurchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
January 3, 2011 - February 6, 2011		207,716	$	39.48		402,265		597,735
February 7, 2011 - March 6, 2011		145,579	$	41.44		547,844		452,156
March 7, 2011 - April 3, 2011		150,000	$	46.73		697,844		302,156

(1)

On September 9, 2010, we announced a new stock purchase program providing for the purchase up to one million additional shares of the Company’s common stock. This program has no deadline for completion. Purchases under the Company’s stock purchase programs may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.

Item 6. Exhibits

Exhibit		Description

3.1		Amended and Restated Articles of Incorporation. Incorporated by reference to Exhibit 3.6 to the Company’s Amendment No. 2 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2000 (File. No. 333-47976).

3.2		Amended and Restated Bylaws. Incorporated by reference to Exhibit 3.8 to the Company’s Amendment No. 1 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 1, 2000 (File. No. 333-47976).

4.1		Form of common stock certificate. Incorporated by reference to Exhibit 4.1 to the Company’s Amendment No. 2 to its Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 22, 2000 (File. No. 333-47976).

10.1		2011 annual cash incentive bonus program. Incorporated by reference to the description of the 2011 annual cash incentive bonus program contained in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 5, 2011 (File No. 000-32233).

31.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

31.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended.

32.1		Certification of the Company’s Chief Executive Officer, Patrick O’Dea, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

32.2		Certification of the Company’s Chief Financial Officer, Thomas Cawley, pursuant to Section 906 of Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	PEET’S COFFEE & TEA, INC.


Date: May 13, 2011	By:	/s/ Thomas P. Cawley
		Thomas P. Cawley
		Vice President, Chief Financial Officer and Secretary

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PEETS COFFEE & TEA INC Reports

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