Caribou A Smaller But Appealing Coffee Alternative

The overall stock market is now down so far in 2011, but coffeehouse chain Caribou Coffee (Nasdaq:CBOU) has seen its shares rally nearly 50% during this period. This impressive run has pushed the earnings multiple up substantially, but the firm is still worth a look if management soon begins delivering on its ambitious earnings growth projections. (For more on the effect earnings has on share prices, check out Earnings Power Drives Stocks.)

TUTORIAL: Earnings Quality

Second Quarter Recap
Sales jumped 16.5% to $80.3 million. Sales at the coffeehouse stores represented almost 75% of total sales and increased a modest 4% on mid single digit comparable store growth. Caribou ended the quarter with 554 stores, 26.5% of which are franchised. Franchise royalties, along with commercial-based sales of its coffee, including pods used for Green Mountain Coffee Roasters' (Nasdaq:GMCR) highly popular Keurig single-cup brewing system, jumped nearly 82% to account for the bulk of the quarterly top-line growth.

Operating income advanced a very healthy 77.5% to $4.6 million because management was able to offset higher commodity prices, which boosted sales costs by 24%, with modest operating and SG&A expense increases of less than 7%. Lower interest expense helped boost net income by almost 83% to $4.4 million, or 21 cents per diluted share.

Outlook
For the full year, Caribou management currently projects sales growth between 11% and 13% and earnings in a range of 39 cents and 41 cents. Both represent increases from previous guidance.

The Story
Caribou's growth has been very modest in recent years. Over the past five years sales have advanced only about 7.5% annually. Additionally, the firm has only been profitable for the last two years. Before that, the last time earnings were positive was back in 2002.

However, the company appears to have reached the scale for consistent profit generation and the ability to ramp future growth. Management has ambitions to boost its store base by at least 10% annually going forward and has also detailed plans for long-term earnings growth of 25%. Along with Peet's Coffee & Tea (Nasdaq:PEET), Caribou represents an appealing niche option in the face of national giants such as Dunkin' Brands Group (Nasdaq:DNKN).

Caribou has also detailed that the vast majority of coffee drinkers brew their coffee at home. As a result, it also sees great potential for its commercial sales, such as via Keurig or competitors that include Sara Lee's (NYSE:SLE) Sensio machines or Kraft's (NYSE:KFT) Tassimo brewing device.

Bottom Line
The share price rally this year has pushed the P/E multiple up to a lofty 30.44, but could start looking more reasonable if earnings start to take off. (To help you determine if this stock is right for your portfolio, read Great Company Or Growing Industry?)

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