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Executives

Mike Tattersfield – President & CEO

Tim Hennessey – CFO

Idalia Rodriguez - IR

Analysts

David Tarantino – Robert W. Baird

Colin Guheen – Cowen and Company

Mark Argento – Craig-Hallum Capital

Rick Fearon – Accretive Capital Partners

Ken Holtman – Unspecified Company

Caribou Coffee Company, Inc. (CBOU) Q1 2010 Earnings Call May 6, 2010 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the Caribou Coffee first quarter 2010 results conference call. (Operator Instructions) I would now like to turn the conference over to Idalia Rodriguez, ICR.

Idalia Rodriguez

Good afternoon everyone. Caribou’s Coffee first quarter 2010 earnings press release was distributed this afternoon after the market closed. If you do not have a copy one may be found on the website at www.cariboucoffee.com in the Investor Relations section.

Joining me today are Mike Tattersfield, President and Chief Executive Officer, and Tim Hennessey, Chief Financial Officer.

Part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be put upon them. The company undertakes no obligation to update any forward-looking statements in order to reflect the events or circumstances that may arise after the date of this conference call.

We refer you to Caribou Coffee's recent filings with the SEC for a more detailed discussion of the risks that could impact future operating results and financial conditions. During this call, management will discuss financial terms such as EBITDA, which is a non-GAAP measure.

While this is a non-GAAP measure of financial performance, management believes it is a common and useful tool in evaluating the company's performance. A reconciliation to comparable GAAP measures can be found on the last page of today's press release as well as on the website in the Investor Relations section.

Following the presentation today, Mike and Tim will be able to answer your questions. With that I would like to turn the call over to Mike Tattersfield, CEO.

Mike Tattersfield

Thanks Idalia, good afternoon everyone and thank you for joining us this afternoon. I’ll lead off the call by updating you on the progress we are making on our strategic initiatives and then turn the call over to Tim who will walk you through the highlights of our financial performance for the quarter.

As many of you know our team has spent the last year and a half balancing the financial turnaround while building and executing on our long range strategic growth initiatives. During the latter half of 2009 we were able to devote a greater portion of our time, energy, and resources, on our longer-term growth strategy of building a multi channel branded coffee company, utilizing five key levers across our businesses.

Those levers are, drive retail coffeehouse average unit volume, unit growth in company-owned coffeehouses, lower consumer package goods coffee business, a stronger presence in the food service sector, and expanding unit growth in our franchise and license channel.

Our strategy is taking hold and we are seeing positive signs of traction across all three lines of business. Today we reported consolidated net sales growth of 11% for the quarter. Each of our business channels contributed significantly to the growth in our top line, which reinforces our optimism for our ability to transform into a multi channel branded coffee company.

Net income for the quarter was $1 million or $0.05 per diluted share, this is up from $300,000 or $0.02 per in the comparable quarter of last year. We believe this quarter’s performance is reflective of our commitment to deliver profitable growth each quarter while continuing to invest in the areas necessary to expand the Caribou brand through our multi channel growth strategy.

I’d like to take a few moments to walk you through some highlights from each of our business segments, within the coffeehouse segment increasing the average unit volume of our coffeehouse is the biggest opportunity and our top priority.

I am happy to report that we are having success. Comparable coffeehouse sales were up 5.2% in the quarter which beat our internal estimates. We are focused on growing average unit volume two ways, drive increasing levels of traffic into our coffeehouses and increase average check by increasing beverage, food, and bean merchandise sales to our guests.

To drive traffic, we have ramped up our marketing and product management initiatives to make sure Caribou Coffee is top of mind for our guests. We launched our new [Bou] marketing campaign in March which provided a fresh new look to our brand. New Bou is focused on our guests and our culture and through this initiative we are making sure that Caribou Coffee is the community place that our guests love.

We have changed the look and feel of our products, point of sale messaging, general merchandising, as well as our website, to provide a more youthful and playful look, more representative of our culture. These include new branding efforts highlighting our Bouisms, which are simple and fun little phrases that remind our guests of all the things in life to stay awake for.

Our focus on product management has demonstrated to our guests that Caribou is committed to providing premium product and outstanding value. We are differentiating our brand through the introduction of new premium products such as real chocolate based beverages, wholesome oatmeal, and distinctive teas.

At the core of these product introductions are the consistent things that premium quality, all natural and customizable offerings. We handcraft each of these offerings to our guests’ individual taste, and the feedback has been tremendous.

We believe our guests want an extraordinary experience and these product investments are driving loyalty and frequency. The next extension of this product philosophy will be found in our breakfast sandwich launch.

We are currently in test at 45 locations and we look to add 100 to 150 stores in the back half of 2010, with a full rollout in Q1 of 2011. The combination of these marketing and product investments working together to build traffic and average check is the first key step to unlocking our long-term AUB growth, strategy within the coffeehouse channel.

In terms of new store development within the retail coffeehouse segment I am happy to announce that we have recruited a head of real estate for our development team. This was an area that we had scaled back on during the last 18 months but will be a key component of our longer-term growth.

For the remainder of 2010 we will be primarily focused on rebuilding the development team and real estate pipeline. Building high quality real estate and people pipelines will be key success metrics. And we will not compromise on our discipline to do this right.

I would now like to transition to our commercial and franchise and license segments, combined these businesses grew by 52% in Q1, continuing a very strong trend of quarterly growth. Our commercial channel which is comprised of CPG sales of our packaged coffee, [inaudible] sales, office coffee and food service sales was up 58% in the quarter.

This segment continues to grow in prominence for us and the first quarter made up over 13% of our total revenues, compared to 9% in the first quarter of 2009. We have benefited from our strong growth in distribution throughout 2009, and our market share of the premium category now stands at greater than 4%.

As we discussed last quarter we have invested significantly in marketing support programs to expand our distribution outside of our core markets. We are confident that Caribou Coffee offers exceptional quality coffee in the premium category, as well as tremendous value for the consumers’ dollar.

Our team is actively engaged in executing our strategy to drive trial and increase turns in the stores we are in today through a blend of trade promotional investments, along with consumer brand awareness programs.

We will continue our focus on this business as this is an area where we see potential for significant growth for many years. Our partnership with Keurig remains strong. We have added blends to provide a broader range of Caribou flavor profiles that can be found in a single serve format.

We anticipate that this partnership will also benefit our growth moving forward. Before turning it over to Tim I would like to reiterate that we are pleased with the progress in our financial performance which allows us to engage in our long-term multi channel branded coffee strategy that will fuel significant growth for Caribou Coffee.

Our first quarter was another positive step towards these efforts. I will now turn it over to Tim.

Tim Hennessey

Thanks Mike, and thanks everyone for joining us today. I’ll walk through our first quarter results, provide you some color on the remainder of the year, and then open things up for your questions.

As Mike mentioned our first quarter consolidated net sales of $67.1 million were up 11% compared to the first quarter of 2009, with growth being driven across all segments. Comparable coffeehouse sales were up 5.2% in the quarter.

This was driven by a combination of improving traffic as well as an increase in our average ticket which has been fueled by incremental food sales primarily driven by the introduction of oatmeal. Our commercial business drove a 58% increase in top line for the quarter.

This growth in sales was attributable to growth with our existing customers in 2400 new doors added during the second half of 2009. Throughout 2010 we are focusing on continuing to increase our turns across all existing doors while strategically targeting select new grocery partners who can build on our ACD base.

Our franchise and license business grew their top line by 36% in the quarter. This was driven by a combination of new stores opened in the second half of 2009 as well as some product sales shipped in that quarter for stores yet to be opened.

Our gross margin was 53.2% in the quarter. This is down from our full year 2009 gross margin rate of 55.9% as the sales mix from our commercial and franchise segments continued to grow this impacts our blended margin at a company level.

In addition we invested in higher levels of trade promotional programs in our commercial segment and invested in higher quality product platforms launched in our retail coffeehouse segment. These investments are part of our core brand building strategy.

For the quarter operating expenses increased by approximately $1.6 million driven by variable costs related to our higher sales base as well as the marketing and product management investments that Mike mentioned.

As a percent of sales operating expenses of 37.2% decreased 150 basis points providing evidence of leverage we are achieving on our strong top line sales performance. In the quarter we invested approximately $1.1 million more in marketing and product development than we did in the comparable quarter of 2009.

Much of this is driven by the premium quality, all natural and customizable product offerings, and brand building initiatives that Mike spoke about. Its worth noting that in Q1 of 2009 we had scaled back on this type of investment spending as part of our cost management efforts. This is a good example of the balance we are maintaining in selecting the key areas for reinvestment back into the business towards our multi channel growth strategy while maintaining our commitment to bottom line growth.

Depreciation and amortization expense was a $3.1 million decrease by $600,000 in the quarter. This decrease was from our lower depreciable asset base and reduced capital spending over the past two years. On a full year basis we do expect depreciation to be slightly lower than the prior year as depreciation related to the new capital investments will be offset by the declines in existing asset based depreciation.

General and administrative expenses of $6.5 million decreased slightly over the prior year. This was primarily due to the costs rationalization efforts in 2009. We expect our G&A run rate to increase in future quarters as we begin to round out functional areas necessary to support our top line growth.

EBITDA of $4.6 million was relatively flat compared to the prior year. We are pleased with our top line growth which has enabled us to increase operating investments back into our business for the future. As I mentioned earlier during the quarter we invested an incremental $1.1 million in marketing and product development towards products launch and products in test within our retail coffeehouse segment during the quarter compared to Q1 of 2009.

In addition we invested an incremental $1.5 million in trade promotional activities in marketing within our commercial business. For Q4 of last year and in the current quarter we are lapping very minimal investments in these areas in the prior comparable periods. As we look forward we will begin lapping more comparable levels of these types of investment spending and anticipate showing EBITDA expansion in the remaining comparable quarters of 2010 which I’ll discuss later.

For the quarter we reported net income of $1 million or $0.05 per share which is up from $0.02 per share in Q1 of last year. We ended the quarter with $17.7 million in cash on hand and no debt. During the quarter our main use of cash was for normal seasonal working capital requirements as well as inventory build supporting our growth.

In terms of the remainder of the year we expect full year sales to grow between 5% to 6% on an as reported basis, which equates to 7% to 8% growth when normalizing for the 53rd week in 2009. We now expect that our retail coffeehouses will drive comparable coffeehouse sales of 3% to 4% on a full year basis, with some flattening out in positive comps expected over the course of the year given what we are lapping in the prior year.

If you’ll recall we were lapping over negative 5% comparable coffeehouse sales in Q1 whereas we will be lapping over slightly positive comps in Q4. We project our commercial sales growth to be in the 35% range on a full year basis. We are expecting net earnings of $0.39 to $0.42 per share on a full year basis which would reflect solid growth on the $0.26 per share we reported in 2009.

As a reminder the 53rd accounting week in 2009 added $0.02 a share in earnings for last year. We plan to deliver quarterly growth on earnings in each of the remaining quarters of 2010 compared to respective prior year following our historical seasonality patterns.

From a capital investment standpoint we estimate full year spending to be $13 to $15 million for the year. These capital investments include product management initiatives such as ovens, maintenance CapEx in our stores, new unit build out costs, and some investments in our support center facility.

That concludes our prepared remarks for this afternoon. We are now ready for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of David Tarantino – Robert W. Baird

David Tarantino – Robert W. Baird

Just a couple of questions for you, maybe to start off with a little bit of a broader question about the quarter, I know that you said retail comps exceeded your expectations internally, would you say the same thing about profitability or did you choose to invest some of that back into some of the initiatives.

Mike Tattersfield

We chose to invest that back into some of the initiatives, taking advantage of where we were seeing things during the quarter.

David Tarantino – Robert W. Baird

And then maybe if you could expand a little bit more on the strong same store sales that you had, maybe if you add a little bit more color what you think is driving the strength, if its entirely some of the new products that you rolled out during the quarter or if it’s the base business is improving as well.

Mike Tattersfield

It’s a combination, we’ve been fundamentally working on trying to improve our operations so as you get operating performance and traffic starts coming back to our business we’ve been seeing the traffic up trend since Q4 of last year with programs such as Happy Monday, where folks have been able to engage in the brand.

And then we’ve translated that as we introduced the real chocolate platform that came in in December and the January, the fun part of the year and that kind of accelerated some of the momentum in traffic. And then when we introduced the strategy as we started talking about introducing new platforms to the system such as the cereal platform that came in with oatmeal, that added a significant growth vehicle inside of our stores.

So we look at that and as we’re, as I talked about food as we look at going forward in the back end of the year we’re in test in 40-plus stores in the Minnesota and DC markets and we’re looking to see how we expand that to 150 stores at the back end of the year.

But that is our mindset, is clearly there’s momentum in the business, we’re seeing the guest experience giving us credit and then the new products that we’re rolling into the business as well.

David Tarantino – Robert W. Baird

And curious have you seen that momentum continue into Q2 so far.

Mike Tattersfield

We have.

David Tarantino – Robert W. Baird

And then on the marketing efforts and specifically the rebranding that you recently underwent, I’m curious to hear more about the consumer reaction to that and if that’s continued to help trend or what you’ve seen from those efforts so far.

Mike Tattersfield

Very positive, both from an internal consumer, as our team members, really basically, how is Caribou its culture and how does it represent itself both internally and externally. There is a lot of really interesting benefits that come from this but if you have seen this in our new web pages, seeing how customers talk about the brand and when we’re integrating that with what our product strategy is, it starts to connect.

And that’s one of the things that we were trying to do is, we didn’t come in here to kind of just change everything that’s been done at Caribou, that has a pretty good history and a pretty strong DNA, what we came, is how do we evolve it so that it can actually continue to capture the customers’ attention. And as we bring in these new products and you start to show where the brand is going, it clearly starts to differentiate what we are and what we’re not.

But clearly most of the things that we’ve seen and even the feedback that we get have been very positive.

Operator

Your next question comes from the line of Colin Guheen – Cowen and Company

Colin Guheen – Cowen and Company

Couple of questions, I know we don’t have the segment margins but how did the commercial profit margin come out. I know that was low in the fourth quarter, it sounds like there was some similar drivers occurring here in the first quarter and then how does that play out for the rest of the year. I know you’ve been aggressive in the commercial side of the business to drive volumes.

Tim Hennessey

It improved in the quarter relative to where we were in the fourth quarter and obviously that’s part of what we’re doing as we’re managing the business forward. As we entered in the heavy door volume that I talked about in the last half of last year, we went into those knowing that we were going to need to support those doors.

So we did improve our margins in the quarter, but still down obviously from the comparable quarter of a year ago, but the trend line is what we’re managing to.

Colin Guheen – Cowen and Company

And then behind your comp guidance, first can you just walk us through the calendar one more time for the rest of the year as things roll into the stores and then how much of that is baked I guess into that 3% to 4% comp guidance or is it just basically initiatives that you have in now that you feel you can drive that 3% to 4% comp with.

Mike Tattersfield

Again, we’ve been launching platforms, so we will be continuing to extend our platform so right now we’ve just shifted to a blended or an iced chocolate platform which will then, we introduced tea in the first quarter. We’re going to a different version, an iced tea, but a distinctive iced tea platform in the second half of the summer. So the things that we spent in the first half of the year focusing on introducing, we will do line extensions of those platforms as we continue to move forward.

And we have other new products that are in test still today to see how those are going to continue to perform. We plan on launching those in the back end of the year. As well as we keep on rolling out our sandwich program. So the guidance is a combination. We are getting, the traffic is continuing to stick. People are coming back to our brand and they’re coming back across all of our geographies.

So that’s a very positive sign for us.

Colin Guheen – Cowen and Company

Just I guess the competitive environment for drinks it sounds like there’s going to be a lot of QSR news around drinks and maybe some pretty low price points out there, how does that kind of, does that enter your competitive or your [inaudible] work heading into the summer.

Mike Tattersfield

Yes, we always look at competition. But we have our strategy. We have affordable luxury strategy. We do focus on premium handcrafted natural high quality ingredients. So we are different. So I do believe that that is what resonates with our guests and that’s where we’re going to continue to move forward with.

Colin Guheen – Cowen and Company

Just one last numbers question, a number for G&A for 2010, how much growth over 2009 are you expecting.

Tim Hennessey

We’ll be managing that, the G&A line in terms of we know we have some positions to round out yet in functional areas and we’ll be doing that over the quarter and basically manage that within kind of a 10% of revenue range. So as we can build the top line and then fill in on some of these resources so that’s kind of how we guide it.

Operator

Your next question comes from the line of Mark Argento – Craig-Hallum Capital

Mark Argento – Craig-Hallum Capital

Could you talk a little bit more about the food and kind of what you’ve seen so far or what your experience has been overall with the 40 or 50 store test and what works and then thinking a little bit more about that next tranche of beta stores, are those going to be all store owned, do you have any plans to start doing any kind of franchise stores and just some thoughts around that.

Mike Tattersfield

Initial feedback that we’re getting from guests is meeting our expectations, things that are working as we’d like them to see. So we are continuing to look forward to planning our rollout as we had to get to 150 stores. We are focused primarily right now just in the morning handheld sandwiches, so that is going to be where we’re going to be spending a lot of our attention.

We will be eventually looking at what is the afternoon sandwich program look like but we’ll be getting that in the test probably at the back end of the year. So looking at something like that to continue in 2011. From an expansion on the second part I believe you’re just saying, was it expansion?

Mark Argento – Craig-Hallum Capital

Yes, just what are your thoughts in terms of that next tranche of stores and then also I guess tacking on to that, how do you look at the opportunity you’re making an investment in capital into the equipment and the installation which is I think you talked to it, $25 or $30,000 investment, what kind of AUV growth and kind of margin potential do you see there because I think if you look back in history some of your competitors earlier in their life stage I think it really added material AUV with the food platform. So, I just wanted to kind of get a better understanding of how you see that ramp and what the potential is.

Mike Tattersfield

So first off just going from the morning day part as we take on the rolling the sandwich programs, our goal is to be system wide in Q1 of 2011. So we’re very we will look at this to make sure that the operators, this is new right so we continue to make sure that we can execute at a high level and we really do believe that the experience has to be outstanding as we continue to get into the new category for us, i.e. baking food in our stores.

So that will roll from our current market geographies and then we’ll just expand on the 150 most likely be in the Minnesota marketplace as we expand forward and then continuing on to the rest of the system in Q1.

In terms of, we’ve always looked at what the potential is as we look at our current AUV that are a little more to 550,000, we look at the food platform and again our aspirational model, that’s what could be one day is a, we’ve used the term that million dollar target and we looked at food and the combination of platforms somewhere in the range of 150,000 to 200,000 in terms of the total food program.

But you’re talking about a morning day part, a lunch day part, a dessert day part, all kinds of food products so getting the foundation or getting ovens in is one of the critical key components that we look at and this is the investment of how to we step up and that will, clearly is what the consumer is looking for is they want an exceptional quality food item that matches the exceptional quality beverage that we bring. .

And that’s always been the strategy but you have to do this as we will go through where the bulk of our transactions are first which is in the morning day part, make sure that we perform very well there and then extend that into the lunch business and then look on at adding what are the other key elements and we have a high bar.

Mark Argento – Craig-Hallum Capital

Do you expect, wouldn’t you be able to add an afternoon day part within the first year of having the platform rollout of at least the ovens installed, or what’s to the dating factor there.

Mike Tattersfield

We again will go through Q1 of getting the breakfast program in but we will be testing lunch pretty much probably in the back end of the year. We think that’s again another opportunity because our beverage opportunity is also translate into the lunch time hours and folks continue to ask us, what product offerings do you have for lunch and we have to be able to match those offerings.

So we’ll be testing that so we think that’s a pretty good opportunity for us as well. And clearly see doing the same type of a, it will probably roll much faster because the reason why we’re doing a disciplined roll right now to the store system is to actually install the oven base making sure that team members get experienced with product but once they have the understanding of doing the foundation, you can go quicker with the afternoon or lunch business.

Mark Argento – Craig-Hallum Capital

Thinking a little bit broadly in terms of overall pricing, traffic, as the economy gets hopefully a little bit stronger and gets some better employment numbers here, any thoughts around starting to bump up pricing again, any opportunities there.

Tim Hennessey

There’s always opportunities to do some price optimization, in fact this month we did a bit of that already. But clearly that’s always something on our radar in terms of balancing quality product platforms at the right price point for our guests.

Mark Argento – Craig-Hallum Capital

More of a housekeeping question, do you have a number for the stock comp expense in the quarter.

Tim Hennessey

It was 250.

Operator

Your next question comes from the line of Rick Fearon – Accretive Capital Partners

Rick Fearon – Accretive Capital Partners

Congrats on another nice quarter, last quarter you had projected 1% to 3% comp growth and you’re now increasing that pretty significantly here from to 3% to 4% for the year, can you just shed some light on Q2 comps at this point and how you’re tracking.

Tim Hennessey

We’re tracking at about the same level in the first quarter and I’d say that going into the year if everybody including ourselves we’re being a little cautious about what to put out there and obviously now that we’ve got one quarter behind us its still early. We like what we’re seeing in Q2 but obviously there is a lot going on and as we talked about in the call, we’ll be lapping later in the year some higher comps from last year.

Rick Fearon – Accretive Capital Partners

And on the marketing side are you still sort of at that 2.5 million spend rate that you were at on the first quarter or do you expect that to ramp up.

Tim Hennessey

No in fact we’ll have a bit of decline because we did have some incrementally higher marketing around oatmeal launch, tea, our new brand, new Bou, so Q1 was a bit higher than what we will see in some of the subsequent quarters.

Rick Fearon – Accretive Capital Partners

How are things progressing with the US food service partnership at this point.

Mike Tattersfield

Its still in infancy right, so as we’re getting into there’s six houses today, we’re working through all the nuances with their sales force and even having more top to top discussions as to how do we expand this to broaden it to a much wider audience.

This isn’t to go quickly, this is to get it done really right, making sure that we have the resources and they have the right sales and training allocation to ensure that we can transition. They are clearly looking at Caribou to be their premium coffee provider so that they can penetrate into other accounts as well as transition from some of their current coffee to Caribou as well.

So it’s a huge upside for us. This is one that we’re just being really diligent about making sure that we execute. So as planned, we’re working through it but we expect to see a lot more traction of this as, probably the end of the year as they start to really roll this out to their client base and get a good understanding of our product.

Rick Fearon – Accretive Capital Partners

Does the relationship preclude the company from going direct to any national chains in the meantime.

Mike Tattersfield

No, we can actually have those conversations. As well as some we include to bring US food service in, some we might be doing direct. We try to look at this as a total partnership but again we would be looking at is this something that they’re better to serve or are we better to serve.

Rick Fearon – Accretive Capital Partners

And is that an initiative that’s underway or is that the latter half of the year kind of thing.

Mike Tattersfield

No, those are ongoing as we speak.

Rick Fearon – Accretive Capital Partners

And the oven installation, it sounds really transformative for Caribou in eight months and I guess just with respect to some more color on the Minnesota and DC tests, can you share what same store comps have looked like in those units understanding that you’re really only selling morning baked goods at this point and haven’t broadened that to the afternoon or evening yet.

Mike Tattersfield

What we’re looking at, to give you an idea of how we look at the business because we can look at the comps, but when we launched oatmeal we were looking at doing at, we break down things into like three units per 100 so that really translated to about a 1% increase on same store sales. What we’re seeing with the food program is about 1.5% to 2% increase when you talk about the sandwich or 5.5, 6% when we think about it.

But its fairly consistent. And the challenge that you have on that is you also take away oatmeal, right so its figuring out how the full food program works because its not just 100% incremental. You do actually cannibalize some of the other food programs as you continue to add more food so that’s why we’re looking at this and figuring it out but that’s why I said you could almost say that we’re looking at about a point again like similar to oatmeal, if you’re looking at the incrementality of the business.

Again, early days, we’re in just two test markets and we want to roll this out and just see when you get a full range of 100, 150 stores you get a much better view as to how is it going to play. This is new to Caribou so this is something that we really have to execute well all the way down to the supply chain all the way up stream as well.

Rick Fearon – Accretive Capital Partners

Have you been able to put any marketing muscle behind that effort in those markets yet or is it—

Mike Tattersfield

What’s interesting is you don’t really require that much because especially as the consumers become aware that we have a sandwich program and if you’re saying that it’s at a point of purchase in the store and people have said you do have sandwiches now, I’ll try one. So its actually, we’re getting this type of growth without a lot of marketing spend.

Rick Fearon – Accretive Capital Partners

And can you just update us on the stock repurchase program, were you able to buy any shares in the first quarter and do you expect to get more aggressive ahead of the growth initiatives expected in eight months.

Tim Hennessey

No, we cleared 10,000 in the quarter. The Board authorized the plan but we’re not actively out there at this stage.

Rick Fearon – Accretive Capital Partners

And is there any color you could share on what you’re major shareholder may be thinking about there, obviously you don’t, you’re not inside their heads, but has there been any discussion that you can share with us about their holding and what their plans may be.

Tim Hennessey

No, there’s nothing been going on there.

Operator

Your next question is a follow-up from the line of David Tarantino – Robert W. Baird

David Tarantino – Robert W. Baird

I just wanted to quickly clarify a couple of the comments you had on same store sales to date for Q2, I think on the last conference call you said comps to date has been about plus 4%, if I back into kind of the March run rate it might be closer to plus 5 or 6, just curious is Q2 similar to the March run rate or is it similar the Q1 rate overall. So could it possibly be closer to the plus 6 range.

Tim Hennessey

We are running 5.2 in the quarter and that was the number that I was referring to that were in that kind of, through April, we’re in that 5% range but we do see as you look at our historicals we are anticipating that percentage to decline as we’re lapping better numbers just from a trend line perspective.

David Tarantino – Robert W. Baird

And then just one other follow-up question, I think you said you expect commercial and franchise sales up 35% for the year, I just want to make sure I understand the reason why—

Tim Hennessey

Sorry, its our commercial sales would be in the 35% range. That would exclude franchise and licensing.

David Tarantino – Robert W. Baird

And the reason why that’s slowing from the Q2 rate of plus 59% is that just related to lapping some of the grocery.

Tim Hennessey

Exactly, that’s why we had called out in our comments the 2400 doors that we added in the second half so you’ve got sales in this first half of 2010 to customers in doors that did not exist in 2009.

Operator

Your next question is a follow-up from the line of Colin Guheen – Cowen and Company

Colin Guheen – Cowen and Company

Just one clarification what was the actual commercial sales number in the first quarter excluding franchise.

Tim Hennessey

Excluding franchise, call it $9 million.

Colin Guheen – Cowen and Company

And I guess on this topic of lunch, maybe more generally how do you, lunch is more complicated I would imagine than kind of a hot breakfast sandwich rollout, how do you really prepare the stores and the back of the house to handle that undertaking and what stages are you in. I don’t think we should be thinking about that as a 2010 or 2011 initiative or maybe just give us a feeling on timing.

Mike Tattersfield

You wouldn’t see a lot of benefit of this until the back end of 2011 if we were successful in doing it. We don’t see doing too many things strategically different along the lines of what we’re doing with, we would be looking at a hot sandwich profile that oven baked, again and finished at the store level. So very similar from what we’re doing in the morning day part.

So we do look at how we’re taking this, we might have different offerings. If you said, if you add a quiche or something else like that that you decided to move again fitting that hand held that would be matching what the consumer is looking for but we anticipate very similar, we’re going to find the unique, again that natural high quality product line that we will be able to do at the same speed that we can our morning breakfast part and translate that into a lunch business.

And then eventually you start thinking about it again its platforms that we’re trying to bring into the business translate that into other dessert opportunities that can move as well. This is a long-term build as to how do you start building platforms into our business and again we’ll start being experts in the morning.

Tim Hennessey

And the other thing we’re looking at our leverage points because as Mike says when we build with those lunch sandwiches its how do we leverage that investment in the oven operationally manage it similar to the morning part and leverage the labor.

Colin Guheen – Cowen and Company

So it would fair to say a lot of your volume estimate for the program will be or is estimated to be driven on breakfast at least initially.

Mike Tattersfield

Yes.

Operator

Your final question comes from the line of Ken Holtman – Unspecified Company

Ken Holtman – Unspecified Company

Going back onto the commercial business one of your competitors talked about pricing pressure especially selling into the grocery markets, and I was wondering if you’ve seen anything on price in your markets.

Tim Hennessey

There’s definitely a lot of trade promotional programs going on in the marketplace. It really differs by market but and frankly by grocer for that matter. So we see that, that’s part of what we’re responding to. In addition to the promotional activity that we’re doing with support we’re providing to some of our grocery partners in new doors that we’ve added.

Ken Holtman – Unspecified Company

And what is the total door count now on commercial.

Tim Hennessey

We’re at about 7,000 doors.

Ken Holtman – Unspecified Company

[inaudible] take that.

Mike Tattersfield

I’ll answer that, the potential is 18,000 doors, it isn’t a race about getting more doors right now, its really about trying to be real focused and driving the velocity in the existing door base and then also looking at the same way we approached the retail, what other product lines is the consumer looking for in those doors that we would be able to bring in newness to that business.

But first its established at 7000 doors and making sure that we drive the brand awareness and velocity first and yes, there will be door growth within the geography. We are in the, once you include the single cup business with Keurig, we’re across the United States so but we want to be pretty focused in our core geography where the majority of our doors are which really tends to be more the Midwest going towards the East than towards the West.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Mike Tattersfield

Appreciate everybody for being on the call and look forward to next time. Thank you.

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Source: Caribou Coffee Company, Inc. Q1 2010 Earnings Call Transcript
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