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Company Overview

Caribou Coffee (NASDAQ:CBOU) was founded in 1992 and is the second largest company-operated premium coffeehouse operator in the United States behind Starbucks (NASDAQ:SBUX). As of January 2, 2011, Caribou had 541 coffeehouses (131 franchised) located in 20 states, the District of Columbia and nine international markets.

Caribou is focused on a multi-channel approach and, in addition to its coffee houses, its coffees is also available via grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and e-commerce channels.

Current Valuation

Caribou’s stock has had quite a run recently. The stock, trading at $14.01 per share, was up almost 25% in June, and is up 41% since the end of April.

With a market capitalization of $288 million and an enterprise value of $263 million CBOU is trading at 10x trailing EBITDA and 9.1x consensus 2011 EBITDA.

On an earnings basis the analysis is slightly more complicated. Caribou is only recently profitable and, as a result, is not yet a tax payer. In fact, in Q1 2011 Caribou recorded a tax benefit of $21 million related to a reduction in the Company’s valuation allowance against deferred tax assets (see Q1 2011 earnings press release). The $21 million of deferred tax assets now on the balance sheet will continue to shield taxes but given Caribou’s operating income for 2011 expected to be approximately $15 million the deferred tax assets should be used up in less than a year and a half.

As a result sell-side analyst offer fully taxed “adjusted” EPS estimates, which are the right earnings numbers to use for multiples and valuation purposes. A sum-of-the-parts analysis applying a multiple to fully-taxed earnings and adding in the present value of the deferred tax assets would make sense (of course the DTAs are only 7% of the market cap and would be less on a present value basis so this analysis will ignore them). CBOU is trading at 38x consensus 2011 adjusted earnings, and 30x consensus 2012 adjusted earnings. CBOU has no debt on its balance sheet and $25 million of cash.

Growth

Caribou is a growth story. In 2010 total revenue grew over 8% with commercial and franchise revenue growing almost 47%. Consensus 2011 sales of $306 million implies a 2010/11 growth rate of 7.7%. 2011 EPS is projected to growth at almost 40% versus 2010.

Caribou is growing by increasing the average spend per customer through new offerings such as oatmeal and breakfast sandwiches. Caribou also believes it has ample room to grow the coffeehouse base.

  • In a recent interview Caribou’s CEO cited Atlanta as a city that could grow by 100 locations.
  • Caribou’s investor presentation from May 10, 2011 walks through the company's growth opportunities.

Valuation

The recent run-up in Caribou’s stock is interesting. Why now? One possible reason is that the tax benefit in the first quarter raised some eyebrows and caused investors to take a look. It’s also possible that the impending Dunkin’ Donuts (NASDAQ:DNKN) IPO has led investors to dig into the coffee and coffeehouse industry. Dunkin’s latest S-1 filing was on June 23, 2011.

Starbucks trades at 14.6x trailing EBITDA, and 27.3x FY2011 earnings. Peet’s Coffee & Tea (NASDAQ:PEET), which has less coffeehouses and a larger commercial business (although they do not license to Keurig) trades at 14.9x trailing EBITDA, and 41.7x FY 2011 earnings. These multiples do not make Caribou look over-priced, even with the recent run-up.

However, it makes sense that Caribou would trade at a discount to its peers given its much smaller size and associated lack of liquidity. Clearly, coffee is hot (pun intended). With its stock on the rise Caribou needs to execute or investors may take profits and look elsewhere for future returns.

Source: Caribou Coffee: Valuation Still Reasonable Despite Stock's Recent Run-Up