Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.Financial_Report.xls
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R4.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R2.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R1.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R9.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R8.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R7.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R6.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R3.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R32.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R45.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R50.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R39.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R51.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R17.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R46.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R31.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R42.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R12.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R26.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R30.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R22.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R24.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R48.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R34.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R29.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R28.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R21.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R16.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R53.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R37.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R52.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R43.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R19.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R33.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R11.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R14.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R23.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R47.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R25.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R18.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R49.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R44.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R36.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R15.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R13.htm
EX-32.1 - EX-32.1 - Caribou Coffee Company, Inc.d398832dex321.htm
EX-31.2 - EX-31.2 - Caribou Coffee Company, Inc.d398832dex312.htm
EX-31.1 - EX-31.1 - Caribou Coffee Company, Inc.d398832dex311.htm
EX-32.2 - EX-32.2 - Caribou Coffee Company, Inc.d398832dex322.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R5.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R41.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R38.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R20.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R27.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R10.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R35.htm
XML - IDEA: XBRL DOCUMENT - Caribou Coffee Company, Inc.R40.htm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 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 September 30, 2012.

or

 

¨ 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: 000-51535

 

 

CARIBOU COFFEE COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Minnesota   41-1731219
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
3900 Lakebreeze Avenue North  
Brooklyn Center, Minnesota   55429
(Address of principal executive offices)   (Zip Code)

Registrant’s Telephone Number, Including Area Code: (763) 592-2200

 

 

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  ¨

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 during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer   ¨    Accelerated Filer   x
Non-Accelerated Filer   ¨    Smaller Reporting Company   ¨

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

On November 8, 2012, 20,334,620 shares of Registrant’s $0.01 par value common stock were outstanding.

 

 

 


Table of Contents

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended September 30, 2012

Table of Contents

 

  PART I. FINANCIAL INFORMATION   

Item 1.

  Financial Statements      3   
  Condensed Consolidated Statements of Operations      3   
  Condensed Consolidated Balance Sheets      5   
  Condensed Consolidated Statement of Changes in Equity      6   
  Condensed Consolidated Statements of Cash Flows      7   
  Notes to Condensed Consolidated Financial Statements      8   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      30   

Item 4T.

  Controls and Procedures      30   
  PART II. OTHER INFORMATION   

Item 1.

  Legal Proceedings      31   

Item 1A.

  Risk Factors      31   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      31   

Item 3.

  Defaults Upon Senior Securities      31   

Item 4.

  Mine Safety Disclosures      31   

Item 5.

  Other Information      31   

Item 6.

  Exhibits      32   

Signature

     33   

See accompanying notes.

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
    

(In thousands, except for per share amounts)

(Unaudited)

 

Coffeehouse sales

   $ 61,032      $ 58,695      $ 182,777      $ 176,338   

Commercial and franchise sales

     16,210        22,744        56,131        57,646   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     77,242        81,439        238,908        233,984   

Cost of sales and related occupancy costs

     37,210        41,941        119,071        113,100   

Operating expenses

     26,555        26,291        79,535        78,512   

Depreciation and amortization

     2,547        2,669        7,519        8,373   

General and administrative expenses

     8,161        7,763        23,009        23,703   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,769        2,775        9,774        10,296   

Other income (expense):

        

Interest income

     11        3        35        15   

Interest expense

     (20     (70     (61     (184
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes

     2,760        2,708        9,748        10,127   

Provision for (benefit from) income taxes

     925        803        3,782        (20,484
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,835        1,905        5,966        30,611   

Less: Net income attributable to noncontrolling interest

     113        118        244        328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Caribou Coffee Company, Inc.

   $ 1,722      $ 1,787      $ 5,722      $ 30,283   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic net income attributable to Caribou Coffee Company, Inc. common shareholders per share

   $ 0.09      $ 0.09      $ 0.28      $ 1.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share

   $ 0.08      $ 0.09      $ 0.27      $ 1.46   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic weighted average number of shares outstanding

     19,918        20,232        20,311        20,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average number of shares outstanding

     20,445        20,953        20,934        20,751   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

3


Table of Contents

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
    September 30,
2012
    October 2,
2011
 
    

(In thousands)

(Unaudited)

 

Net income

   $ 1,835       $ 1,905      $ 5,966      $ 30,611   

Other comprehensive income, net of tax:

         

Change in fair value of cash flow hedges, net of tax

     21         (45     (358     5   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,856         1,860        5,608        30,616   

Less: Net comprehensive income attributable to noncontrolling interest

     113         118        244        328   
  

 

 

    

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Caribou Coffee Company, Inc.

   $ 1,743       $ 1,742      $ 5,364      $ 30,288   
  

 

 

    

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

4


Table of Contents

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     September 30,
2012
    January 1,
2012
 
    

In thousands, except per share amounts

(Unaudited)

 
ASSETS     

Current assets:

    

Cash and cash equivalents

   $ 28,586      $ 44,495   

Accounts receivable, net

     7,574        14,646   

Other receivables, net

     2,158        1,743   

Inventories

     45,557        22,965   

Deferred tax assets - current

     3,465        6,766   

Prepaid expenses and other current assets

     1,076        1,514   
  

 

 

   

 

 

 

Total current assets

     88,416        92,129   

Property and equipment, net of accumulated depreciation and amortization

     36,699        36,965   

Deferred tax assets – non-current

     15,664        13,947   

Other assets

     300        323   
  

 

 

   

 

 

 

Total assets

   $ 141,079      $ 143,364   
  

 

 

   

 

 

 
LIABILITIES AND SHAREHOLDERS’ EQUITY     

Current liabilities:

    

Accounts payable

   $ 13,143      $ 10,480   

Accrued compensation

     5,087        6,272   

Accrued expenses

     9,694        8,502   

Deferred revenue

     5,804        8,591   
  

 

 

   

 

 

 

Total current liabilities

     33,728        33,845   

Asset retirement liability

     1,237        1,248   

Deferred rent liability

     4,216        5,132   

Deferred revenue

     1,853        1,883   
  

 

 

   

 

 

 

Total long term liabilities

     7,306        8,263   

Equity:

    

Caribou Coffee Company, Inc. Shareholders’ equity:

    

Preferred stock, par value $.01, 20,000 shares authorized; no shares issued and outstanding

     —          —     

Common stock, par value $.01, 200,000 shares authorized; 20,334 and 20,848 shares issued and outstanding at September 30, 2012 and January 1, 2012, respectively

     203        208   

Additional paid-in capital

     126,027        132,643   

Accumulated comprehensive loss

     (358     —     

Accumulated deficit

     (25,996     (31,718
  

 

 

   

 

 

 

Total Caribou Coffee Company, Inc. shareholders’ equity

     99,876        101,133   

Noncontrolling interest

     169        123   
  

 

 

   

 

 

 

Total equity

     100,045        101,256   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 141,079      $ 143,364   
  

 

 

   

 

 

 

See accompanying notes.

 

5


Table of Contents

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(unaudited)

(in thousands)

 

     Common Stock     Additional          

Accumulated

Other

             
     Number of
Shares
    Amount     Paid-In
Capital
    Noncontrolling
Interest
    Comprehensive
Loss
    Accumulated
Deficit
    Equity  

Balance, January 1, 2012

     20,848      $ 208      $ 132,643      $ 123      $ —        $ (31,718   $ 101,256   

Net income

     —          —          —          244        —          5,722        5,966   

Changes in fair value of cash flow hedges, net of tax

     —          —          —          —          (358     —          (358

Stock based compensation

     —          —          1,431        —          —          —          1,431   

Options exercised

     173        2        866        —          —          —          868   

Restricted shares issued, net of cancellations

     72        1        (1     —          —          —          —     

Stock purchased in accordance with share purchase program

     (759     (8     (8,912     —          —          —          (8,920

Distribution of noncontrolling interest

     —          —          —          (198     —          —          (198
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

     20,334      $ 203      $ 126,027      $ 169      $ (358   $ (25,996   $ 100,045   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes.

 

6


Table of Contents

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
 
    

(In thousands)

(Unaudited)

 

Operating activities

    

Net income

   $ 5,966      $ 30,611   

Adjustments to reconcile net income to net cash used by operating activities:

    

Depreciation and amortization

     9,073        9,843   

Amortization of deferred financing fees

     14        101   

Stock-based compensation

     1,431        1,329   

Deferred income taxes

     1,584        (20,630

Other

     (180     97   

Changes in operating assets and liabilities:

    

Accounts receivable and other receivables

     6,657        (3,115

Inventories

     (22,592     2,923   

Prepaid expenses and other assets

     447        109   

Accounts payable

     2,298        3,099   

Accrued expenses and other liabilities

     (1,140     2,722   

Deferred revenue

     (2,817     (3,058
  

 

 

   

 

 

 

Net cash provided by operating activities

     741        24,031   

Investing activities

    

Payments for property and equipment

     (8,600     (6,650

Proceeds from the disposal of property

     200        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,400     (6,650

Financing activities

    

Distribution of noncontrolling interest

     (198     (305

Purchase of common stock

     (8,920     —     

Issuance of common stock

     868        1,526   

Payment of debt financing fees

     —          (35
  

 

 

   

 

 

 

Net cash (used) provided by financing activities

     (8,250     1,186   
  

 

 

   

 

 

 

(Decrease) increase in cash and cash equivalents

     (15,909     18,567   

Cash and cash equivalents at beginning of period

     44,495        23,092   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 28,586      $ 41,659   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information

    

Noncash financing and investing transactions:

    

Accrual for leasehold improvements, furniture and equipment

   $ 370      $ 583   
  

 

 

   

 

 

 

See accompanying notes.

 

7


Table of Contents

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The “Company” and “Caribou” refer to Caribou Coffee Company, Inc. and its affiliates, collectively.

The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments considered necessary for the fair presentation of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K (File No. 000-51535).

Principles of Consolidation

The Company’s condensed consolidated financial statements include the accounts of Caribou Coffee Company, Inc. and affiliates that it controls. The affiliates are Caribou MSP Airport, a partnership in which the Company owns a 49% interest and that operates six coffeehouses, and Caribou Coffee Development Company, Inc., a licensor of Caribou Coffee branded coffeehouses. The Company controls the daily operations of Caribou Coffee Development Company, Inc. and accordingly consolidates their results of operations. The Company provided a loan to its partner in Caribou MSP Airport for all of the partner’s equity contribution to the venture. Consequently, the Company bears all the risk of loss but does not control all decisions that may have a significant effect on the success of the venture. Therefore, the Company consolidates the Caribou MSP Airport, as it is the primary beneficiary in this variable interest entity. All material intercompany balances and transactions between Caribou Coffee Company, Inc., Caribou MSP Airport and Caribou Coffee Development Company, Inc. have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results may differ from those estimates, and such differences may be material to the consolidated financial statements.

Fiscal Year End

The Company’s fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

The Company’s sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended September 30, 2012 are not necessarily indicative of future results that may be expected for the year ending December 30, 2012.

2. Summary of Significant Accounting Policies

Revenue Recognition

The Company recognizes retail coffeehouse sales for products and services when payment is tendered at the point of sale. Sales tax collected from customers is presented net of amounts expected to be remitted to various tax jurisdictions. Accordingly, sales taxes have no effect on the Company’s reported net sales in the accompanying statements of operations.

 

8


Table of Contents

Revenue from the sale of products to commercial, franchise or on-line customers is recognized when ownership and price risk of the products are legally transferred to the customer, which is generally upon the shipment of goods. Revenues include any applicable shipping and handling costs invoiced to the customer, and the expense of such shipping and handling costs is included in cost of sales.

The Company sells stored value cards of various denominations. Cash receipts related to stored value card sales are deferred when initially received and revenue is recognized when the card is redeemed and the related products are delivered to the customer. Such amounts are classified as a current liability on the Company’s condensed consolidated balance sheets. The Company will honor all stored value cards presented for payment; however, the Company has determined that the likelihood of redemption is remote for certain card balances due to long periods of inactivity (“breakage”). The Company estimates that cards which have had no activity for 48 months are unlikely to be used in the future. In these circumstances, to the extent management determines there is no requirement for remitting balances to government agencies under unclaimed property laws, card and certificate balances may be recognized in the condensed consolidated statements of operations. The Company uses the redemption recognition method and recognizes the estimated value of abandoned cards as a percentage of every stored value card redeemed and includes the amount in coffeehouse sales. Such amounts represent the Company’s experience regarding unused balances related to stored value cards redeemed. The Company excludes stored value card balances sold in jurisdictions which require remittance of unused balances to government agencies under unclaimed property laws. Breakage recognized was immaterial to all periods presented.

Territory development fees and initial franchise fees are recognized upon substantial performance of services for a new territory or coffeehouse, which is generally upon the opening of a new coffeehouse. Royalties based upon a percentage of reported sales are recognized on a monthly basis when earned. Cash payments received in advance for territory development fees or initial franchise fees are recorded as deferred revenue until earned.

All revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates. The Company periodically participates in trade-promotion programs such as shelf price reductions and consumer coupon programs that require the Company to estimate and accrue the expected cost of such programs. Coupons are recognized as a liability when distributed based upon expected consumer redemptions. The Company maintains liabilities based on historical experience and management’s judgment at the end of each period for the estimated expenses incurred, but unpaid for these programs.

Allowance for Doubtful Accounts

Allowance for doubtful accounts is calculated based on historical experience, customer credit risk and application of the specific identification method. A summary of the allowance for doubtful accounts is as follows (in thousands):

 

     September 30,
2012
     January 1,
2012
 

Allowance for doubtful accounts – accounts receivable

   $ 20       $ 59   

Allowance for doubtful accounts – other receivables

     10         6   

Operating Leases and Rent Expense

Certain of the Company’s lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Rent expense is recorded on a straight-line basis over the initial lease term and renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “accrued expenses” and “deferred rent liability” in the consolidated balance sheets. Contingent rents, including those based on a percentage of retail sales over stated levels, and rental payment increases based on a contingent future event are accrued over the respective contingency periods when the achievement of such targets or events are deemed to be probable by the Company.

 

9


Table of Contents

3. Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-06, Comprehensive Income (Topic 820). This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It also requires presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. This accounting standard update became effective beginning in our first quarter of fiscal 2012. In December 2011, the FASB issued ASU No. 2011-12 which indefinitely defers the guidance related to the presentation of reclassification adjustments only. The adoption of this accounting standard update resulted in financial statement presentation changes only.

4. Derivative Financial Instruments

The Company evaluates various strategies in managing its exposure to market-based risks, such as entering into hedging transactions to manage its exposure to fluctuating coffee and dairy commodity prices.

The Company records all derivatives on the condensed consolidated balance sheets at fair value. For those cash flow hedges that have been designated and qualify as an effective accounting hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into net earnings when the hedged exposure affects net income. For those cash flow hedges that are not designated or do not qualify as an effective accounting hedge, the entire derivative gain or loss is recorded in earnings as incurred.

As of September 30, 2012 the Company had accumulated net derivative losses of $0.4 million, net of tax, in other comprehensive income, all of which pertains to derivatives designated as cash flow hedging instruments. Less than $0.1 million of the net derivative losses accumulated as of September 30, 2012 pertains to hedging instruments that will continue to experience fair value changes before affecting earnings. Ineffectiveness from hedges that were discontinued during the thirty-nine week period ended September 30, 2012 was $0.1 million. As of January 1, 2012, the Company did not hold any derivative instruments. Based on notional amounts, as of September 30, 2012, the Company had coffee commodity futures contracts representing approximately 0.3 million pounds of coffee. The Company’s cash flow derivative instruments contain credit-risk-related contingent features. At September 30, 2012, the Company, in the normal course of business, has posted approximately $0.2 million collateral related to these contingent features.

The Company had no derivatives not designated as hedging instruments as of September 30, 2012 and January 1, 2012.

The following table presents the pretax effect of derivative instruments on the consolidated financial statements for the thirteen weeks ended September 30, 2012 and October 2, 2011 (in thousands):

 

     Gain/(Loss)
Recognized in OCI
     Gain/(Loss)
Reclassified into Earnings
 

Contract Type

   September 30, 2012      October 2, 2011      September 30, 2012     October 2, 2011  

Cash flow commodity hedges

   $ 8       $ 11       $ (27   $ 56   

The following table presents the pretax effect of derivative instruments on the consolidated financial statements for the thirty-nine weeks ended September 30, 2012 and October 2, 2011 (in thousands):

 

     Gain/(Loss)
Recognized in OCI
     Gain/(Loss)
Reclassified into Earnings
 

Contract Type

   September 30, 2012     October 2, 2011      September 30, 2012     October 2, 2011  

Cash flow commodity hedges

   $ (704   $ 128       $ (27   $ 124   

There were no gains or losses excluded from the assessment of hedge effectiveness during the quarter.

 

10


Table of Contents

5. Fair Value Measurements

GAAP defines fair value, establish a framework for measuring fair value, and establish a fair value hierarchy that prioritizes the inputs used to measure fair value:

 

   

Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.

 

   

Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

 

   

Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

The following table presents the financial assets measured at fair value on a recurring basis as of September 30, 2012 (in thousands):

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Cash

   $ 5,746       $ 5,746       $ —         $ —     

Commercial Paper

   $ 22,839       $ 22,839       $ —         $ —     

Liabilities:

           

Derivatives

   $ 7       $ 7       $ —         $ —     

The following table presents the financial assets measured at fair value on a recurring basis as of January 1, 2012 (in thousands):

 

     Total      Level 1      Level 2      Level 3  

Assets:

           

Cash

   $ 13,685       $ 13,685       $ —         $ —     

Money market funds

   $ 2       $ 2       $ —         $ —     

Commercial paper

   $ 30,808       $ 30,808       $ —         $ —     

Cash and cash equivalents include cash held at FDIC-insured financial institutions and highly liquid money market funds. The fair value of money market funds is determined using quoted market prices in active markets for identical assets, thus they are considered to be Level 1 instruments.

We also hold positions in a commercial paper product with a highly rated financial institution that are redeemable on demand and earn a stated interest rate. Because funds are redeemable on demand, our carrying value approximates fair value. Our commercial paper product is considered to be a Level 1instrument and is included in cash and cash equivalents in our condensed consolidated balance sheets.

Derivative assets consist of commodity futures contracts. The amounts in the table above represent the gross fair value of the derivative liability. The Company nets the derivative assets and liabilities in the hedging program, including cash collateral, when a master netting arrangement exists between the Company and the counterparty to the derivative contract. The amount or timing of cash collateral balances may impact the classification of the derivative in the condensed consolidated balance sheets. The gross fair value of the commodity contracts in the table above is exclusive of cash collateral receivable of $0.2 million as of September 30, 2012 and is included in prepaid expenses and other current assets. The Company uses quoted prices in an active market for identical derivative assets and liabilities that are traded in exchanges. These derivative liabilities are included in Level 1.

 

11


Table of Contents

6. Inventories

Inventories consist of the following (in thousands):

 

     September 30,
2012
     January 1,
2012
 

Coffee

   $ 36,864       $ 15,923   

Merchandise held for sale

     5,752         4,498   

Supplies

     2,941         2,544   
  

 

 

    

 

 

 
   $ 45,557       $ 22,965   
  

 

 

    

 

 

 

At September 30, 2012 and January 1, 2012, the Company had fixed price inventory purchase commitments, primarily for green coffee, aggregating approximately $39.3 million and $69.7 million, respectively. These commitments are through approximately 24 months.

7. Stock Purchase Program

On February 22, 2010, the Board of Directors approved a stock purchase program providing for the purchase by the Company of up to $10 million of the Company’s common stock. During the thirty-nine weeks ended September 30, 2012, the Company purchased 759,000 shares of common stock, at an average price of $11.75, in accordance with this stock purchase program. No shares were purchased during the thirteen weeks ended September 30, 2012.

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. As of September 30, 2012, there is $1.0 million remaining for future stock repurchases under the Company’s stock purchase program.

8. Equity and Stock Based Compensation

The Company maintains stock compensation plans, which provide for the granting of non-qualified stock options and restricted stock to officers and key employees and certain non-employees. Stock options have been granted at prices equal to the fair market values as of the dates of grant. Options and restricted stock generally vest over four years and options generally expire ten years from the grant date. Upon exercise of an option, new shares of stock are issued by the Company. Stock-based compensation expense for the thirteen weeks ended September 30, 2012 and October 2, 2011 was approximately $0.5 million in both periods and is included in general and administrative expenses in the condensed consolidated statements of operations. Stock-based compensation expense for the thirty-nine weeks ended September 30, 2012 and October 2, 2011 was approximately $1.4 million and $1.3 million, respectively.

Stock option activity during the period indicated is as follows (in thousands, except per share and life data):

 

     Number of
Shares
    Weighted
Average
Exercise Price
     Weighted
Average
Contract
Life
 

Outstanding, January 1, 2012

     1,036      $ 3.45         6.1 Yrs   

Granted

     61      $ 16.70      

Exercised

     (116   $ 3.99      

Forfeited

     (4   $ 5.25      
  

 

 

   

 

 

    

Outstanding, April 1, 2012

     977      $ 4.20         6.1 Yrs   

Exercised

     (53   $ 7.33      

Forfeited

     (29   $ 2.11      
  

 

 

   

 

 

    

Outstanding, July 1, 2012

     895      $ 4.08         5.9 Yrs   

Exercised

     (3   $ 4.59      

Forfeited

     (3   $ 6.26      
  

 

 

   

 

 

    

Outstanding, September 30, 2012

     889      $ 4.07         5.7 Yrs   
  

 

 

   

 

 

    

Options vested at September 30, 2012

     803      $ 3.17         5.4 Yrs   
  

 

 

   

 

 

    

 

12


Table of Contents

Our stock options were issued with an exercise price equal to the market price of our common stock on the date of grant. The weighted average fair value of our options granted during the thirty-nine week period ended September 30, 2012 was $8.97 per share. We estimated the fair value of each stock option award on the date of grant using a Black-Scholes option pricing model, modified for dividends and using the following assumptions:

 

     September 30,
2012
 

Expected stock price volatility

     64.8

Expected life

     4.9 Yrs   

Risk free interest rate

     0.9

Dividend yield

     0.0

Restricted Stock activity during the period indicated is as follows (in thousands, except per share data):

 

     Number of
Shares
    Weighted
Average  Grant
Date

Fair Value
 

Outstanding, January 1, 2012

     550      $ 8.02   

Granted

     137      $ 16.70   

Vested

     (141   $ 8.54   

Forfeited

     (41   $ 9.26   
  

 

 

   

 

 

 

Outstanding, April 1, 2012

     505      $ 10.12   

Exercised

     (3   $ 1.86   

Forfeited

     (29   $ 9.09   
  

 

 

   

 

 

 

Outstanding, July 1, 2012

     473      $ 10.24   

Granted

     9      $ 12.84   

Exercised

     (66   $ 5.09   

Forfeited

     (4   $ 12.49   
  

 

 

   

 

 

 

Outstanding, September 30, 2012

     412      $ 11.11   
  

 

 

   

 

 

 

9. Income Taxes

Prior to fiscal year 2011, a valuation allowance was recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria. During the first thirteen weeks of 2011, we determined that a full valuation allowance against our deferred tax assets was not necessary and recorded a partial reversal of the deferred tax valuation allowance of $21.4 million. We considered the available positive and negative evidence, including our recent earnings trend and expected continued future taxable income including the following discrete events: (1) our attainment of three years of cumulative income and (2) the finalization of our current year and long range financial plan which projects sufficient future taxable income. As of September 30, 2012, there is no valuation allowance for our gross deferred tax assets.

As of September 30, 2012 and January 1, 2012, the Company included $1.5 million and $0.1 million, respectively, of current income taxes payable in accrued expenses on its condensed consolidated balance sheet.

10. Net Income Per Share

Basic and diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share for the thirteen week and thirty-nine periods ended September 30, 2012 and October 2, 2011, were as follows (in thousands, except per share data):

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Net income attributable to Caribou Coffee Company, Inc.

   $ 1,722       $ 1,787       $ 5,722       $ 30,283   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - basic

     19,918         20,232         20,311         20,076   

Dilutive impact of stock-based compensation

     527         721         623         675   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares outstanding - dilutive

     20,445         20,953         20,934         20,751   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic net income per share

   $ 0.09       $ 0.09       $ 0.28       $ 1.51   

Diluted net income per share

   $ 0.08       $ 0.09       $ 0.27       $ 1.46   

 

13


Table of Contents

For the thirteen week and thirty-nine week periods ended September 30, 2012 and October 2, 2011, 0.1 million equity awards were excluded from the calculation of shares applicable to diluted net income per share because their inclusion would have been anti-dilutive.

11. Master Franchise Agreement

In November 2004, the Company entered into a Master Franchise Agreement with a franchisee. The agreement provides the franchisee the right to develop, subfranchise or operate 250 Caribou Coffee coffeehouses in 12 Middle Eastern countries. In June of 2011, the Master Franchise Agreement was amended to expand the rights of the franchisee to develop 350 Caribou Coffee coffeehouses and to extend the expiration date. The agreement, as amended, expires in December 2021.

In connection with the agreement, the franchisee paid the Company a nonrefundable deposit aggregating $3.3 million. In addition to the deposit, the franchisee is obligated to pay the Company $20 thousand per franchised/subfranchised coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee Coffeehouses and $15 thousand for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5 thousand of the initial deposit received by the Company to be applied against the initial franchise fee as discussed herein. Monthly royalty payments ranging from 3%-5% of gross sales are also due to the Company.

As of September 30, 2012 and January 1, 2012, the Company included $1.7 million of the deposit in long term liabilities as deferred revenue and $0.2 million and $0.3 million, respectively in current liabilities as deferred revenue on its balance sheet. The initial deposit will be amortized into income on a pro rata basis along with the initial franchise fee payments received in connection with the execution of the franchise or subfranchise agreements at the time of the coffeehouse opening. The current portion of deferred revenue represents the franchise fees for the coffeehouses estimated to be opened during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At September 30, 2012, there were 102 coffeehouses operating under this Agreement.

12. Revolving Credit Facility

The Company maintains a credit agreement with US Bank, National Association (the “Bank”). The credit agreement provides for a $25 million revolving line of credit, the proceeds of which may be used for general corporate purposes, including funding working capital, capital expenditures and other needs. The line of credit has a maturity date of October 31, 2016.

The Company’s obligations under the line of credit are secured by substantially all of the assets of the Company and interest payable under the revolving credit facility is equal to the amount outstanding under the facility multiplied by the applicable LIBOR rate plus a specified margin. 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 fixed charge coverage ratio. The Company is liable for 0.25% commitment fee on any unused portion of the facility. There are no amounts outstanding under the facility as of September 30, 2012 and January 1, 2012.

Unamortized deferred financing fees capitalized on the balance sheet totaled $0.1 million as of September 30, 2012 and January 1, 2012.

13. Commitments and Contingencies

From time to time, the Company becomes involved in certain legal proceedings in the ordinary course of business. The Company does not believe that any such ordinary course legal proceedings to which it is currently a party will have a material adverse effect on its financial position or results of operations.

 

14


Table of Contents

14. Segment Reporting

Segment information is prepared on the same basis that the Company’s management reviews financial information for decision making purposes. The Company has three reportable operating segments: retail coffeehouses, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. All of the segment sales are from external customers.

Retail Coffeehouses

The Company’s retail segment represented 79.0% and 72.1% of total net sales for first thirteen weeks of 2012 and 2011, respectively and 76.5% and 75.4% of total net sales for the thirty-nine weeks of 2012 and 2011, respectively. The coffeehouses offer customers high-quality premium coffee and espresso-based beverages, food, and also offer specialty teas, whole bean coffee, branded merchandise and related products. The retail segment operated 408 company-owned coffeehouses located in 16 states and the District of Columbia, as of September 30, 2012. The openings and closings of company-owned coffeehouses for the periods presented were as follows:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Company-owned coffeehouses open at the beginning of period

     408         407         412         410   

New company-owned coffeehouses opened during the period

     6         3         7         3   

Company-owned coffeehouses closed during the period

     6         1         11         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Company-owned coffeehouses open at the end of the period

     408         409         408         409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Commercial

The Company’s commercial segment represented 15.4% and 24.3% of total net sales for first thirteen weeks of 2012 and 2011, respectively and 18.8% and 20.6% of total net sales for the first thirty-nine weeks of 2012 and 2011, respectively. The commercial segment sells high-quality premium whole and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues, on-line customers.

Franchise

The Company’s franchise segment represented 5.6% and 3.7% of total net sales for first thirteen weeks of 2012 and 2011, respectively and 4.7% and 4.0% of total net sales for the first thirty-nine weeks of 2012 and 2011, respectively. The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of September 30, 2012, there were 202 franchised coffeehouses in U.S and international markets. The openings and closings of franchise-owned coffeehouses for the periods presented were as follows:

 

     Thirteen Weeks Ended      Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     September 30,
2012
     October 2,
2011
 

Franchised coffeehouses open at the beginning of period

     188         147         169         131   

New franchised coffeehouses opened during the period

     14         5         39         26   

Franchised coffeehouses closed during the period

     0         2         6         7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Franchised coffeehouses open at the end of the period

     202         150         202         150   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

15


Table of Contents

The tables below present information by operating segment for the thirteen and thirty-nine weeks ended September 30, 2012 and October 2, 2011 (in thousands):

Thirteen weeks ended September 30, 2012

 

     Retail
Coffeehouses
     Commercial      Franchise      Unallocated
Corporate
    Total  

Total net sales

   $ 61,032       $ 11,880       $ 4,330       $ —        $ 77,242   

Costs of sales and related occupancy costs

     26,101         8,510         2,599         —          37,210   

Operating expenses

     24,909         1,161         485         —          26,555   

Depreciation and amortization

     2,522         22         3         —          2,547   

General and administrative expenses

     2,146         —           —           6,015        8,161   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 5,354       $ 2,187       $ 1,243       $ (6,015   $ 2,769   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Identifiable assets

   $ 27,875       $ 461       $ 26       $ 8,337      $ 36,699   

Capital expenditures

   $ 3,354       $ 15       $ —         $ 885      $ 4,254   

Thirteen weeks ended October 2, 2011

 

     Retail
Coffeehouses
     Commercial      Franchise      Unallocated
Corporate
    Total  

Total net sales

   $ 58,695       $ 19,758       $ 2,986       $ —        $ 81,439   

Costs of sales and related occupancy costs

     25,831         14,365         1,745         —          41,941   

Operating expenses

     24,473         1,521         297         —          26,291   

Depreciation and amortization

     2,631         34         4         —          2,669   

General and administrative expenses

     2,345         —           —           5,418        7,763   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating (loss) income

   $ 3,415       $ 3,838       $ 940       $ (5,418   $ 2,775   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Identifiable assets

   $ 27,645       $ 886       $ 38       $ 8,874      $ 37,443   

Capital expenditures

   $ 2,218       $ 107       $ —         $ 499      $ 2,824   

Thirty-nine weeks ended September 30, 2012

 

     Retail
Coffeehouses
     Commercial      Franchise      Unallocated
Corporate
    Total  

Total net sales

   $ 182,777       $ 44,862       $ 11,269       $ —        $ 238,908   

Costs of sales and related occupancy costs

     78,957         33,504         6,610         —          119,071   

Operating expenses

     74,994         3,389         1,152         —          79,535   

Depreciation and amortization

     7,434         76         9         —          7,519   

General and administrative expenses

     6,394         —           —           16,615        23,009   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating income (loss)

   $ 14,998       $ 7,893       $ 3,498       $ (16,615   $ 9,774   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Identifiable assets

   $ 27,875       $ 461       $ 26       $ 8,337      $ 36,699   

Capital expenditures

   $ 7,129       $ 52       $ —         $ 1,693      $ 8,874   

 

16


Table of Contents

Thirty-nine weeks ended October 2, 2011

 

     Retail
Coffeehouses
     Commercial      Franchise      Unallocated
Corporate
    Total  

Total net sales

   $ 176,338       $ 48,243       $ 9,403       $ —        $ 233,984   

Costs of sales and related occupancy costs

     75,029         32,688         5,383         —          113,100   

Operating expenses

     73,543         4,264         705         —          78,512   

Depreciation and amortization

     8,267         94         12         —          8,373   

General and administrative expenses

     6,874         —           —           16,829        23,703   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating (loss) income

   $ 12,625       $ 11,197       $ 3,303       $ (16,829   $ 10,296   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Identifiable assets

   $ 27,645       $ 886       $ 38       $ 8,874      $ 37,443   

Capital expenditures

   $ 3,724       $ 227       $ —         $ 2,299      $ 6,250   

All of the Company’s assets are located in the United States, and approximately 2.1% of the Company’s consolidated sales come from outside the United States.

15. Subsequent Events

Subsequent to the Company’s fiscal third quarter 2012, Hurricane Sandy struck the east coast of the United States damaging a portion of the Company’s green coffee inventory held in a New Jersey warehouse. The Company is currently assessing the extent of the damage, including the reclamation and usability potential as well as avenues for recovery. The preliminary estimated book value of the damaged inventory is less than $5 million. Retail coffeehouse operations were not materially impacted by the storm.

 

17


Table of Contents

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

The information in this Management’s Discussion and Analysis section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended January 1, 2012 contained in the our Form 10-K (File No. [000-51535]).

FORWARD-LOOKING STATEMENTS

Certain statements in this report and other written or oral statements made by or on behalf of Caribou Coffee are “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Caribou Coffee brand and other factors disclosed in the our filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

Founded in 1992, we are one of the leading branded coffee companies in the United States, with a compelling multi-channel approach to our customers. Based on number of coffeehouses, we are the second largest company-operated premium coffeehouse operator in the United States. As of September 30, 2012, we had 610 retail locations, including 202 franchised locations. Our coffeehouses are located in 22 states, the District of Columbia and ten international markets. Our coffeehouses aspire to be the community place loved by our guests who are provided with an extraordinary experience that makes their day better. Our coffeehouses offer customers high-quality premium coffee and espresso-based beverages, foods and coffee lifestyle items. We believe we create a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service. Our success in the retail channel has elevated the Caribou Coffee brand and created demand across other channels, including various commercial and foodservice categories. We sell our high-quality whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers nationwide. We seek to continue to grow our brand internationally through franchise agreements and we expect to selectively enter into franchising partnerships domestically. Through our multi-channel approach, we believe we offer a total coffee solution platform to our customers.

Our comparable coffeehouse sales have significantly improved driven by the expansion of our food product offerings such as hot oatmeal, breakfast sandwiches and lunch sandwiches. We have reported positive comparable coffeehouse sales over the previous twelve quarters, including 3.5% for the quarter ending September 30, 2012. Our commercial segment in the first thirty-nine weeks of 2012 represented approximately 20% of total net sales, up from less than 5% in 2007. Caribou Coffee whole bean and ground coffee products are found in grocery, mass merchant and club stores in over 40 states, allowing us to expand our brand recognition through this segment and reach customers across the United States. We also sell our blended coffees and license our brand to Green Mountain Coffee Roasters, Inc., an industry leader in single-cup brewing technology, for sale and use in its K-Cup single serve line of business. Caribou Coffee K-Cups represent an important portion of our commercial business. This enables Caribou Coffee products to be available in all 50 states. Our franchise segment franchises our brand to partners to operate Caribou Coffee branded coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations.

Critical Accounting Policies

The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended January 1, 2012, (File No. [000-51535]) includes a summary

 

18


Table of Contents

of the critical accounting policies we believe are the most important to aid in understanding our financial condition and results of operations. We believe those critical accounting policies are significant or involve additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts.

Fiscal Periods

Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Each fiscal quarter reported herein will consist of two four-week months and one five-week month.

Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended September 30, 2012 are not necessarily indicative of future results that may be expected for the year ending December 30, 2012.

Thirteen Weeks Ended September 30, 2012 vs. Thirteen Weeks Ended October 2, 2011

Results of Operations

The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations:

 

     Thirteen Weeks Ended           Thirteen Weeks Ended  
     September 30,
2012
    October 2,
2011
    %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)           As a % of total net sales  
Statement of Operations Data:           

Net sales:

          

Coffeehouse

   $ 61,032      $ 58,695        4.0     79.0     72.1

Commercial and franchise

     16,210        22,744        (28.7 )%      21.0     27.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     77,242        81,439        (5.2 )%      100.0     100.0

Cost of sales and related occupancy costs

     37,210        41,941        (11.3 )%      48.2     51.5

Operating expenses

     26,555        26,291        1.0     34.4     32.3

Depreciation and amortization

     2,547        2,669        (4.6 )%      3.3     3.3

General and administrative expenses

     8,161        7,763        5.1     10.6     9.5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     2,769        2,775        (0.2 )%      3.6     3.4

Other income (expense):

          

Interest income

     11        3        266.7     0.0     0.0

Interest expense

     (20     (70     (71.4 )%      0.0     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for income taxes and noncontrolling interest

     2,760        2,708        1.9     3.6     3.3

Provision for income taxes

     925        803        15.2     1.2     1.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,835        1,905        (3.7 )%      2.4     2.3

Less: Net income attributable to noncontrolling interest

     113        118        (4.2 )%      0.1     0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Caribou Coffee Company, Inc.

   $ 1,722      $ 1,787        (3.6 )%      2.2     2.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Sales

Net sales decreased $4.2 million, or 5.2%, to $77.2 million in the third thirteen weeks of 2012 from $81.4 million in the third thirteen weeks of 2011. Coffeehouse net sales increased $2.3 million, or 4.0%, to $61.0 million in the third thirteen weeks of 2012 from $58.7 million in the third thirteen weeks of 2011. Commercial and franchise sales decreased by $6.5 million, or 28.7%, to $16.2 million for the third thirteen weeks of 2012 from $22.7 million for the third thirteen weeks of 2011. Commercial segment sales decreased by $7.9 million or 39.9% based on lower green coffee sales and royalties related to Caribou Coffee K-cups, partially offset by increased sales of packaged coffee to our grocery, mass merchant and club store customers and increased sales to our foodservice customers. Franchise sales grew by $1.3 million or 45.0% primarily due to new franchise and license locations.

 

19


Table of Contents

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs decreased $4.7 million, or 11.3%, to $37.2 million in the third thirteen weeks of 2012, from $41.9 million in the third thirteen weeks of 2011. On a dollar basis, this decrease was attributable to lower sales. As a percentage of total net sales, cost of sales and related occupancy costs decreased to 48.2% in the third thirteen weeks of 2012 from 51.5% in the third thirteen weeks of 2011. This decrease as a percentage of sales was due to change in the sales mix. Our change in sales mix was driven largely by lower sales of green coffee related to Caribou Coffee K-cups, which are sold at cost.

Operating expenses. Operating expenses increased $0.3 million, or 1.0%, to $26.6 million in the third thirteen weeks of 2012, from $26.3 million in the third thirteen weeks of 2011. On a dollar basis, this increase was primarily driven by increased marketing investments and higher fees for debit card transactions, partially offset by lower labor and maintenance costs in our retail segment. Operating expenses as a percentage of total net sales increased to 34.4% in the third thirteen weeks of 2012 from 32.3% in the third thirteen weeks of 2011 due to deleveraging on lower green coffee sales and royalties related to Caribou K-cups which have lower operating expenses associated with those sales.

Depreciation and amortization. Depreciation and amortization decreased $0.1 million, or 4.6%, to $2.5 million in the third thirteen weeks of 2012, from $2.7 million in the third thirteen weeks of 2011. This decrease is due to a lower depreciable asset base from reduced capital spending in fiscal years 2011, 2010 and 2009.

General and administrative expenses. General and administrative expenses increased $0.4 million, or 5.1%, to $8.2 million in the third thirteen weeks of 2012, from $7.8 million in the third thirteen weeks of 2011. As a percentage of total net sales, general and administrative expenses was 10.6% in the third thirteen weeks of 2012, compared to 9.5% in the third thirteen weeks of 2011. This increase is due deleveraging on lower green coffee sales and royalties related to Caribou K-cups.

Interest expense. Interest expense remained relatively flat at less than $0.1 million for both the third thirteen weeks of 2012 and 2011. We had no outstanding borrowings during the third thirteen weeks of 2012 or 2011.

Provision for income taxes. Tax expense during the third thirteen weeks of 2012 was $0.9 million compared to a tax expense of less than $0.8 million in the same period of 2011.

Operating Segments

Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the third thirteen weeks of fiscal 2012 and 2011.

Retail Coffeehouses

 

     Thirteen Weeks Ended     Thirteen Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of coffeehouse sales  

Coffeehouse sales

   $ 61,032       $ 58,695         4.0     100.0     100.0

Costs of sales and related occupancy costs

     26,101         25,831         1.0     42.8     44.0

Operating expenses

     24,909         24,473         1.8     40.8     41.7

Depreciation and amortization

     2,522         2,631         (4.1 )%      4.1     4.5

General and administrative expenses

     2,146         2,345         (8.5 )%      3.5     4.0
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 5,354       $ 3,415         56.8     8.8     5.8
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

The retail segment operates company-owned coffeehouses. As of September 30, 2012, there were 408 company-owned coffeehouses in 16 states and the District of Columbia.

Sales

Coffeehouse sales increased $2.3 million, or 4.0%, to $61.0 million in the third thirteen weeks of 2012 from $58.7 million in the third thirteen weeks of 2011. This increase is attributable to a 3.5% increase in comparable coffeehouse sales in the third thirteen weeks of 2012 as compared to the same period in 2011. The increase in comparable coffeehouse sales was primarily driven by increased traffic and a change in the mix of beverage sales as well as increases in bean and merchandise sales.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.3 million, or 1.0%, to $26.1 million in the third thirteen weeks of 2012, from $25.8 million for the third thirteen weeks of 2011. The increase in total dollars was driven primarily by increase cost of goods related to our 3.5% growth in comparable coffeehouse sales. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales decreased to 42.8% for the third thirteen weeks of 2012 from 44.0% for the third thirteen weeks of 2011 due leveraging higher sales against primarily fixed occupancy costs. Cost of sales related to coffee commodity prices remained generally flat when compared to the prior year period.

Operating expenses. Operating expenses increased $0.4 million, or 1.8%, to $24.9 million for the third thirteen weeks of 2012, from $24.5 million for the third thirteen weeks of 2011. On a dollar basis, this increase was due to increased marketing investments and higher fees for debit card transactions, partially offset by lower labor and maintenance costs As a percentage of coffeehouse net sales, operating expenses decreased to 40.8% in the third thirteen weeks of 2012 from 41.7% in the third thirteen weeks of 2011, due to sales leverage gained on labor and maintenance costs.

Depreciation and amortization. Depreciation and amortization decreased $0.1 million, or 4.1%, to $2.5 million for the third thirteen weeks of 2012, from $2.6 million for the third thirteen weeks of 2011. Depreciation and amortization was lower in the quarter due to a lower depreciable asset base.

General and administrative expenses. General and administrative expenses decreased $0.2 million, or 8.5%, to $2.1 million for the third thirteen weeks of 2012, from $2.3 million for the third thirteen weeks of 2011. This decrease is due to lower performance based compensation through the third thirteen weeks of 2012.

Commercial

 

     Thirteen Weeks Ended     Thirteen Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of commercial sales  

Sales

   $ 11,880       $ 19,758         (39.9 )%      100.0     100.0

Costs of sales and related occupancy costs

     8,510         14,365         (40.8 )%      71.6     72.7

Operating expenses

     1,161         1,521         (23.7 )%      9.8     7.7

Depreciation and amortization

     22         34         (35.3 )%      0.2     0.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 2,187       $ 3,838         (43.0 )%      18.4     19.4
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers. In addition, we sell our blended coffees and license our brand to Green Mountain Coffee Roasters for sale and use in its K-Cup single serve line of business. Green Mountain Coffee Roasters, an industry leader in single

 

21


Table of Contents

cup brewing technology, facilitates the sale and distribution of Caribou K-Cups. Caribou Coffee K-Cups represent an important portion of our commercial business. As of September 30, 2012, Caribou Coffee can be found in over 40 states and in approximately 9,000 stores through our Caribou-managed sales channel. Caribou Coffee K-Cups are found in, we believe, an additional 17,000 stores across all 50 states.

Sales

Sales decreased $7.9 million, or 39.9%, to $11.9 million in the third thirteen weeks of 2012, from $19.8 million in the third thirteen weeks of 2011. This decrease is primarily attributable to a decrease in blended coffee sales to Green Mountain Coffee Roasters for use in the K-Cup business and related royalties partially offset by incremental sales to new and existing grocery and foodservice customers.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs decreased $5.9 million, or 40.8%, to $8.5 million for the third thirteen weeks of 2012, from $14.4 million for the third thirteen weeks of 2011. On a dollar basis, this decrease in cost of sales was related to the decrease in blended coffee sales to Green Mountain Coffee Roasters for use in the K-cup business. As a percentage of sales, cost of sales and related occupancy costs decreased to 71.6% for the third thirteen weeks of 2012, from 72.7% for the third thirteen weeks of 2011 due to change in sales mix. The overall sales decrease was due to lower blended coffee sales which are sold at zero margin.

Operating expenses. Operating expenses decreased $0.3 million, or 23.7%, to $1.2 million for the third thirteen weeks of 2012, from $1.5 million for the third thirteen weeks of 2011 due to lower labor costs from open positions. As a percentage of sales, operating expenses increased to 9.8% in the third thirteen weeks of 2012 from 7.7% in the third thirteen weeks of 2011. The increase is attributable to the deleveraging on lower blended coffee sales for use in Caribou Coffee K-cups.

Franchise

 

     Thirteen Weeks Ended     Thirteen Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of franchise sales  

Sales

   $ 4,330       $ 2,986         45.0     100.0     100.0

Costs of sales and related occupancy costs

     2,599         1,745         48.9     60.0     58.4

Operating expenses

     485         297         63.3     11.2     9.9

Depreciation and amortization

     3         4         (25.0 )%      0.1     0.1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 1,243       $ 940         32.2     28.7     31.5
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The franchise segment franchises our brand to partners to operate Caribou Coffee branded kiosks and coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations. As of September 30, 2012, there were 202 franchised coffeehouses in the U.S and international markets.

Sales

Sales increased $1.3 million, or 45.0%, to $4.3 million in the third thirteen weeks of 2012, from $3.0 million in the third thirteen weeks of 2011 primarily due to higher product sales and royalties from 202 franchise locations, a net increase of 52 locations from the prior year.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.9 million, or 48.9%, to $2.6 million for the third thirteen weeks of 2012, from $1.7 million for the third thirteen weeks of 2011

 

22


Table of Contents

due primarily to our increase in product sales to our franchise partners. As a percentage of sales, cost of sales and related occupancy costs increased to 60.0% for the third thirteen weeks of 2012, from 58.4% for the third thirteen weeks of 2011. This increase in cost of sales and related occupancy costs as a percentage of sales was due to sales mix changes with product sales driving a slightly higher proportion of sales versus royalties and franchise fees.

Operating expenses. Operating expenses increased $0.2 million, or 63.3%, to $0.5 million in the third thirteen weeks of 2012, from $0.3 million in the third thirteen weeks of 2011. As a percentage of sales, operating expenses increased to 11.2% in the third thirteen weeks of 2012 from 9.9% in the third thirteen weeks of 2011. This increase is primarily related to higher labor costs to support our growing franchise business.

Unallocated Corporate

 

     Thirteen Weeks Ended     Thirteen Weeks Ended  
     September 30,
2012
    October 2,
2011
    %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)           As a % of total net sales  

General and administrative expenses

     6,015        5,418        11.0     7.8     6.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

   $ (6,015   $ (5,418     11.0     7.8     6.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses. General and administrative expenses increased $0.6 million, or 11.0%, to $6.0 million for the third thirteen weeks of 2012 from $5.4 million for the third thirteen weeks of 2011. As a percentage of total net sales, general and administrative expenses increased to 7.8% in the third thirteen weeks of 2012, from 6.7% in the third thirteen weeks of 2011. This increase was due to higher support center personnel costs to support our company initiatives.

Thirty-Nine Weeks Ended September 30, 2012 vs. Thirty-Nine Weeks Ended October 2, 2011

Results of Operations

The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations:

 

     Thirty-Nine Weeks Ended           Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)           As a % of total net sales  

Statement of Operations Data:

      

Net sales:

          

Coffeehouse

   $ 182,777      $ 176,338        3.7     76.5     75.4

Commercial and franchise

     56,131        57,646        (2.6 )%      23.5     24.6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net sales

     238,908        233,984        2.1     100.0     100.0

Cost of sales and related occupancy costs

     119,071        113,100        5.3     49.8     48.3

Operating expenses

     79,535        78,512        1.3     33.3     33.6

Depreciation and amortization

     7,519        8,373        (10.2 )%      3.1     3.6

General and administrative expenses

     23,009        23,703        (2.9 )%      9.6     10.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     9,774        10,296        (5.1 )%      4.1     4.4

Other income (expense):

          

Interest income

     35        15        133.3     0.0     0.0

Interest expense

     (61     (184     (66.8 )%      0.0     (0.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before provision for (benefit from) income taxes and noncontrolling interest

     9,748        10,127        (3.7 )%      4.1     4.3

Provision for (benefit from) income taxes

     3,782        (20,484     (118.5 )%      1.6     (8.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     5,966        30,611        (80.5 )%      2.5     13.1

Less: Net income attributable to noncontrolling interest

     244        328        (25.6 )%      0.1     0.1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Caribou Coffee Company, Inc.

   $ 5,722      $ 30,283        (81.1 )%      2.4     12.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

23


Table of Contents

Net Sales

Net sales increased $4.9 million, or 2.1%, to $238.9 million in the first thirty-nine weeks of 2012 from $234.0 million in the first thirty-nine weeks of 2011. Coffeehouse net sales increased $6.4 million, or 3.7%, to $182.8 million in the first thirty-nine weeks of 2012 from $176.3 million in the first thirty-nine weeks of 2011. Commercial and franchise sales decreased by $1.5 million, or 2.6%, to $56.1 million for the first thirty-nine weeks of 2012 from $57.6 million for the first thirty-nine weeks of 2011. Commercial segment sales decreased by $3.4 million, or 7.0%, due to lower green coffee sales and royalties related to Caribou Coffee K-cups, partially offset by increased sales of packaged coffee to our grocery, mass merchant and club store customers and increased sales to our foodservice customers. Franchise sales grew by $1.9 million or 19.8% primarily due to new franchise and license locations.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $6.0 million, or 5.3%, to $119.1 million in the first thirty-nine weeks of 2012, from $113.1 million in the first thirty-nine weeks of 2011, primarily due to higher sales and higher coffee commodity costs. As a percentage of total net sales, cost of sales and related occupancy costs increased to 49.8% in the first thirty-nine weeks of 2012 from 48.3% in the first thirty-nine weeks of 2011. This increase as a percentage of sales was due to higher coffee commodity costs on a year over year basis.

Operating expenses. Operating expenses increased $1.0 million, or 1.3%, to $79.5 million in the first thirty-nine weeks of 2012, from $78.5 million in the first thirty-nine weeks of 2011. On a dollar basis, this increase was primarily driven by increased marketing investment and higher debit card transaction fees, partially offset by lower labor costs. Operating expenses as a percentage of total net sales decreased to 33.3% in the first thirty-nine weeks of 2012 from 33.6% in the first thirty-nine weeks of 2011 as we were able to gain leverage within on other operating expenses, primarily labor costs.

Depreciation and amortization. Depreciation and amortization decreased $0.9 million, or 10.2%, to $7.5 million in the first thirty-nine weeks of 2012, from $8.4 million in the first thirty-nine weeks of 2011. This decrease is due to a lower depreciable asset base from reduced capital spending in recent fiscal years.

General and administrative expenses. General and administrative expenses decreased $0.7 million, or 2.9%, to $23.0 million in the first thirty-nine weeks of 2012, from $23.7 million in the first thirty-nine weeks of 2011. As a percentage of total net sales, general and administrative expenses was 9.6% in the first thirty-nine weeks of 2012, compared to 10.1% in the first thirty-nine weeks of 2011. This decrease is due to lower performance based compensation through the first thirty-nine weeks of 2012.

Interest expense. Interest expense remained relatively flat at less than $0.1 million for both the first thirty-nine weeks of 2012 and 2011. We had no outstanding borrowings during the first thirty-nine weeks of 2012 or 2011.

Provision for (benefit from) income taxes. Tax expense during the first thirty-nine weeks of 2012 was $3.8 million compared to a tax benefit of $20.5 in the same period of 2011. In the first thirty-nine week period of 2011, our net income tax benefit consisted primarily of a reduction of a portion of our valuation allowance on our deferred tax assets as described further below.

A valuation allowance was originally recorded against our deferred tax assets as we determined the realization of these assets did not meet the more likely than not criteria. During the first quarter of 2011, we determined that a full valuation allowance against our deferred tax assets was not necessary and recorded a partial reversal of the deferred tax valuation allowance of $21.3 million. We considered the available positive and negative evidence, including our recent earnings trend and expected continued future taxable income including the following discrete events: (1) our attainment of three years of cumulative income and (2) the finalization of our current year and long range financial plan which projects sufficient future taxable income. As of September 30, 2012, we no longer maintain a valuation allowance for any of our gross deferred tax assets.

 

24


Table of Contents

Operating Segments

Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the first thirty-nine weeks of fiscal 2012 and 2011.

Retail Coffeehouses

 

     Thirty-Nine Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of coffeehouse sales  

Coffeehouse sales

   $ 182,777       $ 176,338         3.7     100.0     100.0

Costs of sales and related occupancy costs

     78,957         75,029         5.2     43.2     42.5

Operating expenses

     74,994         73,543         2.0     41.0     41.7

Depreciation and amortization

     7,434         8,267         (10.1 )%      4.1     4.7

General and administrative expenses

     6,394         6,874         (7.0 )%      3.5     3.9
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 14,998       $ 12,625         18.8     8.2     7.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The retail segment operates company-owned coffeehouses. As of September 30, 2012, there were 408 company-owned coffeehouses in 16 states and the District of Columbia.

Sales

Coffeehouse sales increased $6.4 million, or 3.7%, to $182.8 million in the first thirty-nine weeks of 2012 from $176.3 million in the first thirty-nine weeks of 2011. This increase is attributable to a 2.9% increase in comparable coffeehouse sales in the first thirty-nine weeks of 2012 as compared to the same period in 2011. The increase in comparable coffeehouse sales was primarily driven by increased traffic and a change in the mix of beverage sales.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $4.0 million, or 5.2%, to $79.0 million in the first thirty-nine weeks of 2012, from $75.0 million for the first thirty-nine weeks of 2011. The increase in total dollars was driven primarily by increase cost of goods related to our 2.9% growth in comparable coffeehouse sales and higher year over year coffee commodity costs. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales increased to 43.2% for the first thirty-nine weeks of 2012 from 42.5% for the first thirty-nine weeks of 2011 due higher coffee commodity costs.

Operating expenses. Operating expenses increased $1.5 million, or 2.0%, to $75.0 million for the first thirty-nine weeks of 2012, from $73.5 million for the first thirty-nine weeks of 2011. On a dollar basis, this increase was primarily due to an increase in fees for debit card transactions and higher investment in marketing, partially offset by lower labor costs. As a percentage of coffeehouse net sales, operating expenses decreased to 41.0% in the first thirty-nine weeks of 2012 from 41.7% in the first thirty-nine weeks of 2011, due leveraging relatively fixed operating expenses against higher sales.

Depreciation and amortization. Depreciation and amortization decreased $0.8 million, or 10.1%, to $7.4 million for the first thirty-nine weeks of 2012, from $8.3 million for the first thirty-nine weeks of 2011. Depreciation and amortization was lower in the quarter due to a lower depreciable asset base.

 

25


Table of Contents

General and administrative expenses. General and administrative expenses decreased $0.5 million, or 7.0%, to $6.4 million in the first thirty-nine weeks of 2012, from $6.9 million in the first thirty-nine weeks of 2011.

Commercial

 

     Thirty-Nine Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of commercial sales  

Sales

   $ 44,862       $ 48,243         (7.0 )%      100.0     100.0

Costs of sales and related occupancy costs

     33,504         32,688         2.5     74.7     67.8

Operating expenses

     3,389         4,264         (20.5 )%      7.6     8.8

Depreciation and amortization

     76         94         (19.1 )%      0.2     0.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 7,893       $ 11,197         (29.5 )%      17.6     23.2
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers. In addition, we sell our blended coffees and license our brand to Green Mountain Coffee Roasters for sale and use in its K-Cup single serve line of business. Green Mountain Coffee Roasters, an industry leader in single cup brewing technology, facilitates the sale and distribution of Caribou K-Cups. Caribou Coffee K-Cups represent an important portion of our commercial business. As of September 30, 2012, Caribou Coffee can be found in over 40 states and in approximately 9,000 stores through our Caribou-managed sales channel. Caribou Coffee K-Cups are found in, we believe, an additional 17,000 stores across all 50 states.

Sales

Sales decreased $3.4 million, or 7.0%, to $44.9 million in the first thirty-nine weeks of 2012, from $48.2 million in the first thirty-nine weeks of 2011. This decrease is primarily based on lower green coffee sales and royalties related to Caribou Coffee K-cups, partially offset by increased sales of packaged coffee to our grocery, mass merchant and club store customers and increased sales to our foodservice customers.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.8 million, or 2.5%, to $33.5 million for the first thirty-nine weeks of 2012, from $32.7 million for the first thirty-nine weeks of 2011. On a dollar basis, this increase in cost of sales was primarily related to higher year over year coffee commodity costs. As a percentage of sales, cost of sales and related occupancy costs increased to 74.7% for the first thirty-nine weeks of 2012, from 67.8% for the first thirty-nine weeks of 2011. This increase in cost of sales and related occupancy costs as a percentage of sales was due to higher coffee commodity costs.

Operating expenses. Operating expenses decreased $0.9 million, or 20.5%, to $3.4 million for the first thirty-nine weeks of 2012, from $4.3 million for the first thirty-nine weeks of 2011, due to lower labor costs from open positions. As a percentage of sales, operating expenses decreased to 7.6% in the first thirty-nine weeks of 2012 from 8.8% in the first thirty-nine weeks of 2011. The decrease is attributable to lower labor costs in our Commercial segment.

Franchise

 

     Thirty-Nine Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
     October 2,
2011
     %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)            As a % of franchise sales  

Sales

   $ 11,269       $ 9,403         19.8     100.0     100.0

Costs of sales and related occupancy costs

     6,610         5,383         22.8     58.7     57.2

Operating expenses

     1,152         705         63.4     10.2     7.5

Depreciation and amortization

     9         12         (25.0 )%      0.1     0.1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

   $ 3,498       $ 3,303         5.9     31.0     35.1
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

26


Table of Contents

The franchise segment franchises our brand to partners to operate Caribou Coffee branded kiosks and coffeehouses in domestic and international markets. In addition, we sell Caribou Coffee branded products to our partners for resale in these franchised locations. As of September 30, 2012, there were 202 franchised coffeehouses in the U.S and international markets.

Sales

Sales increased $1.9 million, or 19.8%, to $11.3 million in the first thirty-nine weeks of 2012, from $9.4 million in the first thirty-nine weeks of 2011 primarily due to higher product sales and royalties from 202 franchise locations, a net increase of 52 locations from the prior year.

Costs and Expenses

Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.2 million, or 22.8%, to $6.6 million for the first thirty-nine weeks of 2012, from $5.4 million for the first thirty-nine weeks of 2011 due primarily to our increase in product sales to our franchise partners and higher coffee commodity costs. As a percentage of sales, cost of sales and related occupancy costs increased to 58.7% for the first thirty-nine weeks of 2012, from 57.2% for the first thirty-nine weeks of 2011. This increase in cost of sales and related occupancy costs as a percentage of sales was due to higher commodity costs.

Operating expenses. Operating expenses increased $0.4 million, or 63.4%, to $1.1 million in the first thirty-nine weeks of 2012, from $0.7 million in the first thirty-nine weeks of 2011. As a percentage of sales, operating expenses increased to 10.2% in the first thirty-nine weeks of 2012 from 7.5% in the first thirty-nine weeks of 2011. This increase is primarily related to higher labor costs to support our growing franchise business.

Unallocated Corporate

 

     Thirty-Nine Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    %
Change
    September 30,
2012
    October 2,
2011
 
     (In thousands)           As a % of total net sales  

General and administrative expenses

     16,615        16,829        (1.3 )%      7.0     7.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

   $ (16,615   $ (16,829     (1.3 )%      7.0     7.2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses. General and administrative expenses decreased $0.2 million, or 1.3%, to $16.6 million for the first thirty-nine weeks of 2012 from $16.8 million for the first thirty-nine weeks of 2011. As a percentage of total net sales, general and administrative expenses decreased to 7.0% in the first thirty-nine weeks of 2012, from 7.2% in the first thirty-nine weeks of 2011. This decrease was due to lower performance based compensation through the first thirty-nine weeks of 2012.

 

27


Table of Contents

Liquidity and Capital Resources

The following table summarizes our cash flow activity and should be read in conjunction with the Condensed Consolidated Statements of Cash Flows:

 

     Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    Increase /
(Decrease)
 
     (In thousands)  

Net cash provided by operating activities

   $ 741      $ 24,031      $ (23,290

Net cash used in investing activities

     8,400        6,650        1,750   

Net cash used (provided by) financing activities

     8,250        (1,186     9,436   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

   $ (15,909   $ 18,567      $ (34,476
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents as of September 30, 2012 were $28.6 million, compared to cash and cash equivalents of $44.5 million as of January 1, 2012. Generally, our principal requirements for cash are capital expenditures and funding operations. Capital expenditures include maintenance and remodeling of existing coffeehouses, general and administrative expenditures for items like management information systems and costs for expanding production capacity to meet the growth demands of our business. Currently our requirements for capital have been funded through cash flow from operations.

Net cash provided by operating activities for the first thirty-nine weeks of 2012 was $0.7 million compared to net cash provided by operating activities of $24.0 million for the first thirty-nine weeks of 2011. This $23.3 million decrease in cash provided by operating activities was the result of higher working capital needs, particularly related to inventory and the increase in coffee commodity costs.

Net cash used in investing activities for the first thirty-nine weeks of 2012 was $8.4 million compared to net cash used in investing activities of $6.7 million for the first thirty-nine weeks of 2011. This slight increase in investing activities is due to equipment purchases in the current period to support our retail launches such as carbonated beverages.

Net cash used by financing activities for the first thirty-nine weeks of 2012 was $8.3 million compared to net cash provided by financing activities of $1.2 million for the first thirty-nine weeks of 2011. In this first thirty-nine weeks of 2012, we repurchased 0.8 million shares of our common stock at a total price of $8.9 million, or an average price per share of $11.75 per share.

Our future capital requirements and the adequacy of available funds will depend on many factors, including the pace of our expansion, real estate markets, the availability of suitable site locations and the nature of the arrangements negotiated with landlords for new coffeehouses as well as lease termination costs associated with existing underperforming coffeehouse leases. We expect capital expenditures for fiscal 2012 to be in the range of $13 to $14 million. We believe that our current liquidity and cash flow from operations will provide sufficient liquidity to fund our operations for at least 12 months.

Off-Balance Sheet Arrangements

Other than our coffeehouse leases, we do not have any off-balance sheet arrangements. As of September 30, 2012, we were committed to fixed and price-to-be-fixed green coffee purchase contracts with deliveries expected through August 2014. We only contract for green coffee expected to be used in the normal course of business. We believe, based on relationships established with our suppliers in the past, the risk of non-delivery on such purchase commitments is remote.

Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-06, Comprehensive Income (Topic 820). This accounting standard update eliminates the option to present components of other comprehensive income as part of the statement of equity and requires the total of comprehensive income, the components of net income, and the components of other comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. It also requires presentation on the face of the financial statements of reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statements where the components of net income and the components of other comprehensive income are presented. This accounting standard update became effective beginning in our first quarter of fiscal 2012. In December 2011, the FASB issued ASU No. 2011-12 which indefinitely defers the guidance related to the presentation of reclassification adjustments only. The adoption of this accounting standard update resulted in financial statement presentation changes only.

 

28


Table of Contents

Key Financial Metrics

We review our operations based on both financial and non-financial metrics. Among the key financial metrics upon which management focuses in reviewing our performance are comparable coffeehouse net sales, EBITDA (a non-GAAP measure), cash flow from operations before general and administrative expenses, general and administrative expenses and capital expenditures. Among the key non-financial metrics upon which management focuses in reviewing performance are the number of new coffeehouse openings, average check and transaction count.

The following table sets forth non-GAAP metrics and operating data that do not otherwise appear in our consolidated financial statements as of and for the thirteen weeks and twenty-six weeks ended September 30, 2012 and October 2, 2011:

 

     Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
     September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
     (In thousands, except operating data)  

Non-GAAP Metrics:

        

EBITDA(1)

   $ 5,706        5,812      $ 18,603        19,811   

Operating Data:

        

Percentage change in comparable coffeehouse net sales(2)

     3.5     4.1     2.9     4.3

Company-Owned:

        

Coffeehouses open at beginning of period

     408        407        412        410   

Coffeehouses opened during the period

     6        3        7        3   

Coffeehouses closed during the period

     6        1        11        4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Coffeehouses open at end of period:

        

Total Company-Owned

     408        409        408        409   

Franchised:

        

Coffeehouses opened at beginning of period

     188        147        169        131   

Coffeehouses opened during the period

     14        5        39        26   

Coffeehouses closed during the period

     0        2        6        7   
  

 

 

   

 

 

   

 

 

   

 

 

 

Coffeehouses open at end of period:

        

Total Franchised

     202        150        202        150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total coffeehouses open at end of period

     610        559        610        559   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) See reconciliation and discussion of non-GAAP measures which follow at the end of this section.
(2) Percentage change in comparable coffeehouse net sales compares the net sales of coffeehouses during a fiscal period to the net sales from the same coffeehouses for the equivalent period in the prior year. A coffeehouse is included in this calculation beginning in its thirteenth full fiscal month of operations. A closed coffeehouse is included in the calculation for each full month that the coffeehouse was open in both fiscal periods. Franchised coffeehouses are not included in the comparable coffeehouse net sales calculations.

EBITDA is equal to net income (loss) excluding: (a) interest expense; (b) interest income; (c) depreciation and amortization; and (d) income taxes.

We believe EBITDA is useful to investors in evaluating our operating performance for the following reason:

 

   

Coffeehouse leases are generally short-term and Caribou must depreciate all of the cost associated with those leases on a straight-line basis over the initial lease term excluding renewal options (unless such renewal periods are reasonably assured at the inception of the lease). The Company opened a net 202 company-operated coffeehouses from the beginning of fiscal 2003 through the end of the third quarter of fiscal 2012. As a result, management believes depreciation expense is disproportionately large when

 

29


Table of Contents
 

compared to the sales from a significant percentage of the coffeehouses that are in their initial years of operations. Also, many of the assets being depreciated have actual useful lives that exceed the initial lease term excluding renewal options. Consequently, management believes that adjusting for depreciation and amortization is useful for evaluating the operating performance of the coffeehouses. Furthermore, the Company recorded a significant tax benefit in the first quarter of fiscal 2011 related to the reversal of a valuation allowance against accumulated net operating losses and other deferred tax assets. Consequently, management believes that adjusting for the impact of income taxes is useful in evaluating the overall performance of the Company.

Our management uses EBITDA:

 

   

As a measurement of operating performance because it assists us in comparing our operating performance on a consistent basis, as it removes the impact of items not directly resulting from our coffeehouse operations;

 

   

For planning purposes, including the preparation of our internal annual operating budget;

 

   

To evaluate our capacity to incur and service debt, fund capital expenditures and expand our business.

EBITDA as calculated by us is not necessarily comparable to similarly titled measures used by other companies. In addition, EBITDA: (a) does not represent net income or cash flows from operating activities as defined by GAAP; (b) is not necessarily indicative of cash available to fund our cash flow needs; and (c) should not be considered an alternative to net income, operating income, cash flows from operating activities or our other financial information as determined under GAAP.

 

    Thirteen Weeks Ended     Thirty-Nine Weeks Ended  
    September 30,
2012
    October 2,
2011
    September 30,
2012
    October 2,
2011
 
    (Thousands)  

Net income attributable to Caribou Coffee Company, Inc.

  $ 1,722      $ 1,787      $ 5,722      $ 30,283   

Interest expense

    20        70        61        184   

Interest income

    (11     (3     (35     (15

Depreciation and amortization(1)

    3,050        3,155        9,073        9,843   

Provision for (benefit from) income taxes

    925        803        3,782        (20,484
 

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

  $ 5,706      $ 5,812      $ 18,603      $ 19,811   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes depreciation and amortization associated with our headquarters and roasting facility that are categorized as general and administrative expenses and cost of sales and related occupancy costs on our statement of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risks.

Not applicable.

Item 4T. Controls and Procedures.

We carried out an evaluation, under the supervision and with the participation of our management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and the operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective, as of September 30, 2012, in ensuring that material information relating to us required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms. There were no changes in our internal control over financial reporting during the quarter ended September 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

30


Table of Contents

PART II — OTHER INFORMATION

Item 1. Legal Proceedings.

From time to time, the Company becomes involved in certain legal proceedings in the ordinary course of business. The Company does not believe that any such ordinary course legal proceedings to which it is currently a party will have a material adverse effect on its financial position or results of operations.

Item 1A. Risk Factors.

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended January 1, 2012.

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

Not applicable.

Item 3. Defaults Upon Senior Securities.

Not applicable.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

Not applicable.

 

31


Table of Contents

Item 6. Exhibits.

 

  3.1*    Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to our Annual Report of Form 10-K for the year ended January 2, 2011 (File No. 000-51535)).
  3.2*    Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.2 to our Annual Report of Form 10-K for the year ended January 2, 2011 (File No. 000-51535)).
  4.1*    Specimen Common Stock Certificate of the Registrant (incorporated by reference to our Registration Statement on Form S-1/A filed September 6, 2005 (File No. 333-126691)).
31.1    Certification Pursuant to Rule 13a — 14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification Pursuant to Rule 13a — 14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification Pursuant to 18 U.S. C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Asterisk (*) indicates exhibit previously filed with the Securities and Exchange Commission as indicated in parentheses.

 

32


Table of Contents

SIGNATURE

Pursuant to the requirements 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.

 

CARIBOU COFFEE COMPANY, INC.
By:  

/s/ Michael Tattersfield

  Michael Tattersfield
  Chief Executive Officer and President

Date: November 9, 2012

 

33