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Caribou Coffee (NASDAQ:CBOU) closed October 3 at $10.51 per share after having hit a high of $17.06 on August 12. Since its high on August 12 Caribou is down 38% despite no fundamental change in the company or its growth prospects.

Company Overview

Caribou Coffee (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 July 3, 2011, Caribou operated 407 company-owned coffeehouses and 147 franchised coffeehouse in U.S. and international markets.

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

Current Valuation

At its current price of $10.51 Caribou has a market capitalization of $228.0mm and an enterprise value of $195.5mm. The company has no debt and $32.5mm in cash on its balance sheet.

Caribou is trading at a discount to comparable companies (see table below).

Company

Enterprise Value / LTM EBITDA

Caribou Coffee (CBOU)

7.2x

Starbucks (SBUX)

12.6x

Dunkin’ Brands (NASDAQ:DNKN) (EBITDA for 12 month period ended 3/26/11)

24.6x

Peets Coffee (NASDAQ:PEET)

13.5x

Teavanna (TEA)

24.3x

Panera Bread (NASDAQ:PNRA)

10.2x

Krispy Kreme (NYSE:KKD)

14.4x

Caribou’s discount to its comps can be attributed to its small size and commensurate lack of liquidity. Further, it is a turnaround story that finally achieved profitability in 2009 and the market may still be assessing the ability of the company to continue to execute on its growth strategy.

Nonetheless, it is inexpensive versus its peers, and over the past few quarters, has executed flawlessly on its strategy.

Growth

Caribou is poised to experience continued growth in both its retail and commercial segments. In its August 2011 investor presentation the company outlines its retail growth plan which includes expanding its footprint with an emphasis on markets in which Caribou already has strong brand awareness. The company has also introduced breakfast foods and is testing lunch options. In terms of expansion, Caribou has targeted 10 new locations in 2011 and an additional 20-25 in 2012. In Chicago alone 7 locations are planned for 2011. Further, in a June interview, Caribou’s CEO cited Atlanta as a city that could grow by 100 locations over time.

In the second quarter the commercial business grew 94% year-over-year on top of 51% growth in Q2 2010. The commercial business now represents 21% of sales versus 12.6% in Q2 2010.

While the growth in commercial as a percentage of total revenue has a modest negative impact on gross margins, it is accretive to operating margin. The commercial business achieved an operating margin of 37.2% in Q2 2011 versus the retail business at 8.1%. As the commercial business continues to growth the overall operating margin will improve.

Conclusion

Caribou trades at a discount to its peer group and has a growth strategy in place that is working. However, as a small cap, the stock is subject to significant volatility. For an investor with a long-term view and the stomach for some volatility, it may very well be worth taking a sip.

Source: Caribou Coffee: Worth Taking A Sip After Recent Pullback