Caring Little For Caribou

By Ryan C. Fuhrmann | March 02, 2012 AAA

Caribou Coffee (Nasdaq:CBOU) is a small but growing operator of nearly 600 coffeehouses. Management has set out some ambitious growth goals going forward, and has just started recently delivering on its expectations. The share price valuation assumes many more years of rapid expansion, but is definitely achievable given the small store base and potential of its commercial sales.

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Full-Year Recap
Net sales shot ahead 15% to $326.5 million. Sales at its flagship coffeehouses, which competes with the likes of Dunkin' Brands Group (Nasdaq:DNKN), Peet's Coffee & Tea (Nasdaq:PEET) and the Einstein Noah Restaurant Group (Nasdaq:BAGL), experienced respectable growth of 4.4% to account for the bulk of the top line at more than 74%. Comparable store sales advanced a healthy 4.7% and the store base increased by 40 locations. The rest consisted of commercial and franchise sales, such as the sale of pods to be used in Green Mountain Coffee Roasters' (Nasdaq:GMCR) popular Keurig in-home coffee makers, jumped an impressive 62.3%.

Cost controls helped push operating income ahead by more than 50% to $15.2 million. Lower interest expense and a $20.7 million tax benefit sent net income up by close to 300% to $35.2 million, or $1.69 per diluted share. Backing out the tax gain, management estimated operating earnings of 42 cents per diluted share. It did not provide details on operating cash flow generation during the year. (To know more about income statements, read Understanding The Income Statement.)

For the coming year, Caribou projects net sales growth of 10% on the opening of 55 to 70 new stores and commercial sales growth of 20%. It expects this to boil down to earnings per share between 48 cents and 51 cents per diluted share for annual growth in a range of 14.3 to 21.4%.

The Bottom Line
Caribou's growth has not gone unnoticed by investors, who have collectively sent the stock up towards its all-time highs. At the current share price, the forward P/E is rather lofty at nearly 26, which already assumes the company hits the high end of its earnings guidance. This doesn't look to be justified by the historical track record, but the firm's growth prospects are definitely heating up.

Management has a stated goal of growing sales at least 10% annually and earnings at an ambitious 25% annual clip over the long haul. The earnings valuation will stay lofty as long as management delivers on these goals. For the current year, Caribou's sales growth exceeded its goal, as did earnings from management's estimate of 27 cents per diluted share in recurring earnings in 2010. With a couple of more years of delivering on its earnings ambitions, the stock could start earning its premium valuation. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Ryan C. Fuhrmann did not own shares in any of the companies mentioned in this article.

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