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Caribou Coffee Company, Inc. (NASDAQ:CBOU)

Q3 2012 Earnings Call

November 8, 2012 4:30 PM ET

Executives

Mike Jensen – IR

Mike Tattersfield – President and CEO

Tim Hennessy – CFO

Analysts

David Tarantino – Robert W Baird

Will Slabaugh – Stephens

Nicole Miller – Piper Jaffray

Andy Barish – Jefferies

Sharon Zackfia – William Blair

Matt Bendixen – Craig-Hallum Capital Group

Howard Penney – Hedgeye Risk Management

Kevin Tracey – Oberon Asset Management

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Caribou Coffee Incorporated Third Quarter 2012 Results Conference Call.

As a reminder, today’s conference is being recorded. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session, instructions will be provided at that time for you to queue up for questions.

I would now like to turn the conference over to Mr. Mike Jensen of Caribou Coffee. Please go ahead, sir.

Mike Jensen

Thank you, and good afternoon, everyone. Caribou Coffee’s third quarter 2012 earnings press release was distributed this afternoon after the market closed. If you do not have a copy one maybe found on our website at cariboucoffee.com in the Investors section.

Joining us today are Mike Tattersfield, President and Chief Executive Officer; and Tim Hennessy, Chief Financial Officer.

Please note that part of our discussion today will include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed 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. Actual results may differ materially from those indicated in our forward-looking statements and reported results should not be considered indicative of future performance.

We refer you to Caribou Coffee’s recent filings with the SEC for a more detailed discussion of the risks and uncertainties that could impact the future operating results and financial conditions. Specifically, these risks and uncertainties are described in our most recent Annual Report on Form 10-K, which is on file with the SEC. We will continue to update risks and uncertainties in reports that we subsequently file with the SEC.

On today’s call, we will also discuss some non-GAAP financial measures as we talk about the company’s performance. These will include financial terms such as EBITDA and pro forma net income. While these are non-GAAP measures, management believes they are useful tools in evaluating the company’s performance. Reconciliations of these non-GAAP measures to the GAAP measures we consider most comparable can be found in today’s press release, which is also available on our website in the Investors section.

With that, I would now like to turn the call over to Mike Tattersfield, our CEO.

Mike Tattersfield

Thank you, Mike. Good afternoon, everyone and thank you for joining us on today’s call. I’ll lead out the call with some remarks on our performance against our five lever growth strategy. I will then turn things over to Tim for a discussion of the third quarter financials, our outlook for the remainder of 2012 as well as a preview of our expectations for 2013. At that point we will open up the line for any questions you may have.

Our third quarter performance was solidly in line with our expectation as outlined on our last call, especially in light of the reset and expectations related to the lower green coffee sales in our commercial channel for the current business. We are very pleased the comparable coffeehouse sales were up 3.5% in the quarter near the upper end of our 2% to 4% guidance range.

We also opened 20 new coffeehouses in the quarter six of which were company-owned. Our development team and franchise partners are having a busy fourth quarter as well and we expect to deliver within our range of 10% to 12% total unit growth for the year.

Our Q3 EPS was $0.08, which was slightly better than our expectations and $0.01 better than pro forma EPS of $0.07 a year ago.

We continue to focus on our consistent multi-channel premium coffee business model and are confident in our ability to drive continued growth across all of our lines of business. Our largest segment, the retail coffeehouse channel, performed exceptionally well in the third quarter. Comparable coffeehouse sales were driven by our continued efforts in beverage innovation and food expansion.

In our second quarter, the launch of our carbonated juice and tea platform provided a substantial lift in Q3. This remain particularly relevant as we’re continuing to experience a warmer than usual summer in many of our key markets. We also benefited significantly in the third quarter from the bakery case upgrade, which we rolled out system-wide in mid-August. This upgraded bakery platform, which is inspired by a classic American bake shop motif, added an incremental point of attachment post-launch.

Looking forward, we have some exciting product categories that will continue to drive benefits to our same-store sales. Building off of the success of our spicy real chocolate beverages over the past two years for the upcoming holiday season we will feature a real caramel beverage platform. We are launching this holiday line with the same motivation we had around our real chocolate beverages, real is better, and our guest deserve premium ingredients that match up to the highest quality coffee and espresso. Having sampled these beverages myself, I’m certain that the new caramel platform will add great joy to the holiday season for many of our guests.

2012 holiday season will also be extra special for our Caribou team and guests. And that we will celebrate our 20-year anniversary in December. To tap into the excitement of this milestone, we’re making sure that our guests are part of the celebration through the promotion of 20 daily deals that lead up to our anniversary on December 14.

Beyond 2012, we view continued innovation as a catalyst for our retail coffeehouse business, and have a full product calendar set to rollout in each of our marketing windows. We have benefited from our testing approach and learnings from our teas test in 2012 and are set to launch teas across the entire system in the first quarter of 2013. This additional food platform will drive incremental benefits and return from the investment we made in our TurboChef oven technology in 2010.

We expect teas to play a key role in our expanding food ticket that appeals to guests in both the breakfast and lunch day parts. Our beverage innovation always remains front of mind for us and we are planning a variety of unique Caribou line extensions for next year including leveraging the wildly popular sparkling juice and tea platform with new light options for the summer of 2013.

In summary, we know that a vibrant line is critical to our continued growth of average units volumes and we are pleased with the variety of the core innovation, as well as new or expanded platforms in our pipeline heading into next year. From a development standpoint, we remain on track to open between 10 to 12% total coffeehouse units in 2012, of which approximately 15 will be company-owned units.

As we have laid out our development strategy, we have consistently said that we will primarily be focusing on our existing markets as we seek to increase market density and brand recognition in these existing areas. Our development pipeline this year will allow us to diversify our openings across that portfolio, including company-owned development in two of our strongest markets – Minnesota and Washington, D.C. While it is early, we expect that our 2012 new store openings will perform at a higher average sales volume than our 2011 class in part due to more stores and markets where our current portfolio performs exceptionally well.

As you may recall our 2011 new store opening class of eight stores contained seven in the Chicago trade area. Chicago is a market of significant importance to us as we are seeking to continue to build our brand in multiple channels to help build some density were we currently have a dispersed footprint.

As our 2011 store class in Chicago is crossed or is nearing their one year anniversary, they are trending around the system average for that market. Long-term, we foresee that these stores will be solid performers from a financial standpoint, but perhaps more importantly critical building blocks to expanding our market presence and building our brand in Chicago.

Looking ahead to 2013, we are once again providing initial guidance of overall store growth of 10% to 12% on a system-wide basis, which will include approximately 15 to 20 new company-owned stores. The landscape of these company-owned units will be more similar to 2012 from a diversification standpoint and we will see the bulk of our development in Washington, D.C., Minnesota and Chicago with some potential fill-in opportunities in other markets on an opportunistic basis. We remain extremely confident in our ability to drive growth in new units going forward and look forward to providing you with continued updates.

Our franchise segment continues to perform exceptionally well as an important part of our overall development strategy. During the third quarter, we crossed the 200-store milestone in our overall franchise channel, reflecting significant growth both domestically and internationally.

Transitioning to our commercial channel, while the overall top line in this business was down significantly from last year, it was essentially right on our expectations for the quarter in light of the impact of reduced green coffee sales to Green Mountain related to the current portion pack business. The updated forecast we received from Green Mountain for portion pack sales, which had caused us to raise expectations previously was consistent with the way sales played out in the quarter and reflective of both the channel shifting and reduction in clubstore businesses that we covered on our last call.

We had a nice win in our CPG business in the quarter with the addition of Jewel-Osco grocery chain in the Chicago area, as we discussed the importance of Chicago earlier. This additional CPG account, which is Chicago’s largest supermarket chain, will allow us to continue building our brand in that area to increase stores and volume.

In closing, I’d like to thank our team for all they do. We are heading into a very excited time for the year (inaudible) and the holidays are always special; busy and unique. And this year we have the additional excitement of celebrating our 20th birthday.

Our brand continues to grow and strengthen across all of our businesses. We know that at the heart of our success remains the dedication of our teams who love this great brand as much as I do. We look forward to finishing 2012 with a strong holiday season and heading into 2013 ready and able to realize the opportunities we have in the mid-year.

With that, I will now turn the call over to Tim.

Tim Hennessy

Thanks, Mike. Hello, everyone, and thank you for joining us today. I’ll walk through some highlights of the third quarter as well as provide some color on the remainder of 2012 and our initial outlook for 2013.

In the quarter, consolidated net sales of $77.2 million were down 5.2%, which, as Mike mentioned, was consistent with our expectations. It is unusual for sales to be down for us and the biggest driver of that came from our commercial channel, which declined 40% in the quarter related to the significantly reduced green coffee sales in our Keurig channel.

Our retail business delivered a 4% increase in sales in the quarter on the strength of 3.5% comparable coffeehouse sales and the impact of 15 new stores opened over the past four quarters. As we have restarted development, we have also taken the opportunity to close 11 stores as part of natural lease expirations. These locations typically are in trade areas that have become less desirable over the years.

Third quarter gross margin dollars increased $500,000 to $40 million and were 51.8% of sales compared to 48.5% in Q3 of the prior year. The gross margin percentage was favorably impacted by mix shift as a much lower percentage of our sales were related to low margin green coffee sales to Green Mountain.

In the quarter, operating expenses of 34.4% of sales were up 210 basis points, but were relatively flat on a dollar basis compared to the prior year. This movement in operating expenses as a percent of sales was primarily driven by the impact of a decreased green coffee sales related to our Keurig channel, which as mentioned benefits our COGs percentages, but has the reverse impact on operating expense metrics.

General and administrative expenses of $8.2 million in the quarter increased by $400,000 compared to the prior year, an increase of 110 basis points, as the 40% decline in our commercial sales caused a deleveraging effect on G&A.

Net income for the quarter was $1.7 million, an increase of approximately $150,000 from the comparable pro forma net income of 2011. EPS of $0.08 was up $0.01 compared to pro forma EPS a year ago.

Subsequent to our fiscal third quarter, Hurricane Sandy caused damage to a portion of our green coffee inventory being stored in one of our third-party coffee storage warehouses, which is located in New Jersey. We are currently assessing the extent of the damage including the reclamation and usability potential of the product, as well as possible avenues for recovery. We are estimating that our maximum liability will not exceed $5 million, but our coffeehouse operations were not materially impacted by the storm.

Given that our third quarter was in line with our revised annual expectations, we are updating our full year 2012 guidance to company-wide flat top line revenue compared to 2011, comparable coffeehouse sales of 3% to 4%, our commercial sales decline of approximately 15%, 10% to 12% overall unit growth of which approximately 15 will be new company-owned coffeehouses. We anticipate full-year CapEx to be in the $13 million to $14 million range.

The ultimate impact of the inventory loss related to Hurricane Sandy will impact our 2012 EPS. We will be quantifying the impact of this loss during our fourth quarter. Excluding this non-recurring inventory loss, we are bringing up the bottom end of our EPS range slightly and expect EPS to be in the $0.44 to $0.46 per share range on a full-year pro forma basis.

With that, I’d like to provide a preliminary framework around our expectations for 2013. On a consolidated sales basis, we expect to grow our top line by approximately 6% to 8%. We are planning for comparable coffeehouse sales growth of 2% to 4% given the initiatives that Mike laid out earlier.

On a system-wide basis, we plan to open in the range of 10% to 12% new units of which 15 to 20 units will be company-owned coffeehouses and 45 to 55 will be franchise and license locations. We are also expecting our commercial business to grow at approximately 10%, reflecting where we expect both our Keurig and traditional CPG business to perform in 2013. We will have a negative lapping issue for the first two quarters in 2013.

We are offering preliminary EPS guidance in the range of $0.52 to $0.55 per share, which would equate to approximately 15% to 20% growth on a full year pro forma basis for 2013. While we are expecting to receive some benefit from the easing coffee commodity costs in 2013, we will also be investing some of this commodity benefit back into initiatives to drive our continued brand expansion.

In our coffee purchasing, we have locked our purchases into Q3 of next year, which is consistent with our practice of being fixed in our purchases nine to 12 months into the future. With what we have locked today and estimating the remainder of our needs, we expect approximately $6 million in savings on coffee compared to 2012 of which approximately $4 million will flow through to our P&L, while the remainder will be passed through to Green Mountain related to our Keurig volumes.

Finally, we would anticipate CapEx investments in the range of $13 million to $15 million for 2013 related primarily to new coffeehouse development, the ongoing reinvestment back into our stores, as well as some corporate initiatives.

That concludes our prepared remarks for this afternoon. I’d also like to thank our Caribou team for all of their hard work. Operator, could you please now open the phone lines for Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And now we’ll take our first question from David Tarantino with William W Baird.

David Tarantino – Robert W Baird

It’s Robert W. Baird. Thank you, good afternoon. First question is really, Mike, on – your comments on the performance for the new stores sounded fairly encouraging. I was just wondering if you could give us an update on the development outlook that you’ve provided and how confident you are in being able to hit that target. And where you see that going as you look past 2013, do you expect to be able to continue to drive the number of openings up or do you think 15 to 20 is the right number as you look at your business?

Mike Tattersfield

Yes, I mean, so again we’re pleased where we are from our original store 2012, approximately 15% this year. Looking at the trends, it’s early, but we’re – we see the direction and going where we like them to be. From 2013 as we look at 15 to 20 what we’re really pleased about now is 60% to 70% of those stores are already under lease and all the other stores are identified. This is the first time in our history we’re actually looking at a pipeline of stores in front of the year that we’re developing.

So really it’s the opportunity about how disciplined are we being with the development. What I’d like to continue to focus on is what we’ve started to really think about this as a system approach. We’re trying to do 10% to 12% on a yearly basis, which incorporates both the franchise side, as well as international. And, yes, I’ve talked about eventually one day when we’re best-in-class 8% to 10%,. I can see us continuing to build on our footprint and the right opportunities and eventually going beyond where we’re doing a 15 to 20, but very comfortable around that range right now.

David Tarantino – Robert W Baird

Great, that’s helpful. And then just a couple of questions on the guidance. First, on the current year it sounds like at least the comments suggested earnings for Q3 might have come in slightly above your plan and yet you only raised the low end of the guidance and not the high end of the guidance and I understand you aren’t probably splitting hairs here, but is there anything about Q4 that has you incrementally concerned or cautious at this stage, or is there really no change in your outlook versus what you shared last time?

Tim Hennessy

Yes, no David there is really no change and the feeling was that – we’re tracking as we would like and wanted to just signal on the bottom end that more confidence.

David Tarantino – Robert W Baird

Great. And then last question on 2013 guidance. I appreciate the color that you gave on the coffee cost and it sounds like the net benefit to your P&L is around $4 million. Yet if my math is correct, the growth in operating income that you’re expecting year-over-year is only around $3 million. So coffee cost actually could more than take care of that type of growth. Just wondering maybe if you could walk us through what some of the offsets are. I think you’ve mentioned some investments, but you also have some benefits from growth. So I’m just trying to wonder what the size of some of the investments you’re talking about are.

Tim Hennessy

Yes, so if we call those predominantly the coffee cost and the tailwind we’ll have next year make sure because obviously that’s a big part for us and a big thing that everybody is looking at. But we also have some negative inflation looking into next year around dairy and food that erodes some of that coffee benefit away. And then as Mike outlined, our initiatives that we have around our brand, ongoing development, product innovation, we have talked about that. We would use some of the benefit that we would expect from coffee to fund some of those

And then certainly as we’re looking at our retail comp store growth, there is a lot of investment going back into that, so that really is kind of a net of all the components within that and we think that’s the right thing for us to do on a longer-term basis is to use this opportunity to invest next year and keep focused on the long-haul of where we’re trying to take the company.

David Tarantino – Robert W Baird

Okay. Thank you very much.

Tim Hennessy

You’re welcome.

Operator

And our next question comes from Will Slabaugh with Stephens.

Will Slabaugh – Stephens

Hi, guys, and congrats on a good quarter. With regards to the comp growth for this quarter, I wonder if you could talk about trend you saw in the core beverage segment versus maybe some of your newer product you’ve been offering. And if you could just talk about the growth of both of those pieces and how they came together to produce 3.5% growth for the quarter.

Mike Tattersfield

Yes, so if you think about it, if you wanted to break it down from what was approximately the 3.5% growth, probably a point of that is from the new sparkling cheese and juices. So it’s fundamental that starts getting traction particularly as it really moves in the afternoon (inaudible) segment. So you start to – it was really important for us getting to the cold beverage business. And then as we really also revitalize the bakery system and we have one more attachment from UPH percentage and this just started to happen in August, so you are getting, you are seeing some of that benefit only in one period that you know as we’re thinking about this.

So, you can see that the bakery case that we haven’t really focused on because we’re really driving the sandwich business was laggy. So, it’s important for us not only to provide the bakery case upgrade and product lines and platforms that need to be addressed there as well as the sandwich side, so you can think about that as potentially another point as it starts to continue to evolve and then you just have mix shift come on. But it’s a great learning for us and then next year talked about now we need to figure out the light version of those drinks and look at other alternatives and beverage system.

And as we look now on the platform of a higher ingredient base similar to what we did in chocolate, I see Q4 having a big shift and we just started today. So the caramel launch is happening today for holiday and it’s an exceptional product line. It really does match up with our coffee and will be best-in-class. So I can see a lot of momentum going for that as well.

Will Slabaugh – Stephens

Thanks. That’s helpful. And then just, second question from me is curious on this given this sort of choppiness we’ve heard from other companies with some of your peers out there. But just if you could talk about traffic trends, consumer trends you saw throughout the quarter and then as much you want to speak into October?

Mike Tattersfield

Yes. So normally we don’t break it down, Will, but you know we’ve been fairly consistent, but it’s a combination of traffic has been fairly constant for us, last year we were – we lost a very big frequency card approach. This year we did not, but I can tell now that the trends that we see in the business and what we’ve seen even now going into the fourth quarter are continuing to be at the higher end of our comp guidance. So we’re comfortable, where we are.

Operator

And our next question comes from Nicole Miller with Piper Jaffray.

Nicole Miller – Piper Jaffray

Good afternoon, thank you. Just a couple of quick questions. In terms of the cycle of leases expiring the way they did to the magnitude in this current quarter, is there anything we should be aware of so that we could maybe more properly model company-owned coffeehouses on a net basis going forward?

Mike Tattersfield

No, you know, how are you doing, it’s Mike again?

Nicole Miller – Piper Jaffray

Fine.

Mike Tattersfield

You know, I think you’re always looking at about a 2% type lease, you know, between 1% and 2% if you think about it that way. So, it’s a normal transition effect for us and you continue to see us to do that on a year-by-year basis, so it’s pretty normal occurrence.

Nicole Miller – Piper Jaffray

Okay, great. And then I heard you on that hurricane impact and I was sorry to hear about the coffee storage being disrupted, hopefully no people, I assume, but can you just confirm it doesn’t impact retail operations and also like K-Cup shipments.

Mike Tattersfield

Yes, so most importantly everyone that we know is healthy and we want to see that our community gets back on track. We’ve had a team down there trying to provide support to our third-party folks there as well. So, there was no impact on our store beyond typical store closures in some of our market. But that was really just about a day and a half. There wasn’t anything that was significant.

From a product line, very quickly. I’m really proud of our team. We’re able to redistribute supply chain to get back on product to Green Mountain through another blending facility, probably within 24 hours, how quickly our team can adjust to that, and then it’s really now just reestablishing supply chain from that facility forward, which we’re actively working on now. But we’re pleased with what we’re trying to do, and most importantly we’re happy that we didn’t have a loss of life for folks that were there.

Nicole Miller – Piper Jaffray

Absolutely. Thanks for the update. That’s all I had this afternoon.

Operator

Next we’ll go to Andy Barish with Jefferies.

Andy Barish – Jefferies

Hey, guys. Just wondering how maybe we should think about commercial growth for next year in terms of traditional bag coffee versus kind of cycling through the down first half on green sales to Green Mountain and maybe by the end of the year what you sort of think on overall K-Cup growth for your business.

Tim Hennessy

Yes, well the way you’re describing it, Andy, is exactly the way we’re looking at it is we are recording the growth on a full-year basis, but when you break it down into the quarters, we will be lapping in the first two quarters predominantly have some negative impacts on a lapping solely due to the Green Mountain effect on the last costs co-doors that we have and then building back on from that for the second half of the year. So all of that really kind of averages out to that 10% guidance we’re giving on a full year.

Andy Barish – Jefferies

And do you guys have the – in terms of bag coffee the number of doors you are in at quarter end please?

Tim Hennessy

Yes, we’re about 9,000.

Andy Barish – Jefferies

Okay, and then one – just one final question on kind of coffee deflation for next year, we too have thought maybe a little bit more was going to flow through, but understand from the investment – is some of the “investment” also going into sort of trade promotion in the aisles, et cetera?

Tim Hennessy

Yes, we are – they are obviously two different issues and maybe on the first, I think somewhere even looking around at others what their headwind was in 2012 and what they are calling out to be either tailwind for 2013, our numbers are pretty much in line with what we’re seeing from other people, so just kind of that perspective and then specific on trade there isn’t a lot of trade activity going on now, and we expect that to continue into next year and we’ll see how the year plays out and how much trade activity actually does get executed by the coffee players in relation to mainly not bringing down price directly in relation to the tailwind, but maybe stepping up a bit more on promotions.

Andy Barish – Jefferies

Thanks, Tim.

Tim Hennessy

Thank you.

Operator

(Operator Instructions) Next we’ll go to Sharon Zackfia with William Blair.

Sharon Zackfia – William Blair

Hi, good afternoon. Mike, I think I heard you say that the Chicago openings were kind of in line with the base in Chicago and for some reason I had thought that you were targeting them to be better than the overall base and I may have just misunderstood, but could you go over what you have seen in Chicago and how that stacks out versus your initial expectations?

Mike Tattersfield

Yes, so as we laid out in our market development plan, each individual market has very specific targets. One of the things given the competitive nature of the market of Chicago, and what we wanted to develop there, we clearly thought about that market, from penetrating, and how we get to the market average quickly, we’re starting to see that. More importantly, we’re also looking at not just the coffeehouse opportunity there, but it was really important for us to start to diversify even with the Jewel in getting the kiosk business inside of their store business and that growing.

It is a market where we are – this is probably the most competitive market that we face from a significant unit count. So, it’s really important about how we do that. In other markets that as we clearly in 2012 started to diversify outside of that market, we have seen the performance and we have the same type of rigor where from the market either getting to the market average or the top third in the market depending on each one in its competitive set, that’s what we’re seeing in our business that we’re very comfortable about where the trajectory is.

Sharon Zackfia – William Blair

Okay, and then separately in the CPG segment you kind of, outside of Keurig, do you have a – can you kind of go over what the targeted initiatives are for 2013?I mean are we going to see new product entries from Caribou or is it really just more expansions along the line or more doors or what have you?

Tim Hennessy

I would say it’s primarily trade activity that we’re doing along with consumer marketing programs. We are looking at some specific tests that we’re going to run from a consumer standpoint in a couple of select markets to see how those play out, but that’s predominately been our focus in driving the commercial businesses, continuing to expand doors with existing relationships, bringing on, obviously, as Mike talked about, bringing on the Jewel-Osco account in Chicago and then working the velocity on that. And there are some other fill-ins that we have targeted, but it’s a lot of the blocking and tackling to drive ACV and velocity within those stores.

Sharon Zackfia – William Blair

Okay. And then the J.C. Penney test, is that just a one-off or is that something we should be monitoring and could prove to be something bigger?

Tim Hennessy

No, I think it’s worth monitoring. As you’re – I’m sure you’re aware we did build a prototype out for them in a Dallas location and we’re continuing with our dialog with them and – well, both parties I think are eager to see where we can take that.

Sharon Zackfia – William Blair

Great. Thank you.

Tim Hennessy

Welcome.

Operator

And we’ll take our next question from Matt Bendixen with Craig-Hallum Capital Group.

Matt Bendixen – Craig-Hallum Capital Group

Hey, guys. I’m just curious in terms of new store growth for 2013, is that going to be largely back-half loaded much like 2012?

Mike Tattersfield

You’ll see more of a spread among – as we start to take the difference between development when we first started this, which we were basically think of the scrambling to get to unit count and then the end up being backend loaded, which end up seeing now as more of an even distribution in Q1, Q2, Q3, Q4 with potential, as we say between 15 and 20 stores and that’s the development cycle that we really know works well for our operating team as well. So it’s pretty critical that we maintain that versus trying to put all of the discipline at the back end of the year especially at holiday cycle, it becomes very challenging for our operators and then you start to get into weather factors as well. So it’s something that we’ve got – we’re putting those disciplines in now to have a smoother curve.

Matt Bendixen – Craig-Hallum Capital Group

Yes, that’s helpful. And then just wondering is there any opportunity to move on to the Green Mountain kind of introduced the new Espresso machine, is that a platform that you would be involved in at all or not really?

Mike Tattersfield

If you think about it so we have a great partnership with them. Their new machine is called Rivo and it’s going to launch in very limited locations in small markets very similar approach to what they did with Vue, they kept it very small. We were then picked as a partner to join the Vue platform and I anticipate with our discussions – we are the coffeehouse brand that actually brews espresso in this marketplace. So it’s – you can see that there will be a natural fit for us to how to do that, in both our coffeehouse business model as well inventory.

Matt Bendixen – Craig-Hallum Capital Group

That’s great. Thanks guys.

Operator

We’ll take our next question from Howard Penney with Hedgeye Risk Management.

Howard Penney – Hedgeye Risk Management

And I think you just actually answered my question essentially, but I was curious as to your relationship with Green Mountain. It doesn’t’ seem again from the outside that someone (inaudible) has managed the relationship very well with you and how they treated your brand. So, maybe you’ve answered it, but it just anything outside that doesn’t seem like they’re putting their brand ahead of yours I guess is the way I would characterize it. Thank you.

Mike Tattersfield

You know if you think about it, one of the things that’s happened very well from the inception of Keurig is they’ve done a pretty good job managing our brand and putting that across the country and help us become a national brand. And you will hear there are lot of things that happens sometimes, there’s channel shifting and things that they’re probably unaware of as they – the business really changed on them and competitive set came in and a lot of other opportunities happened. But they realized as we do that we have an exceptionally strong brand that customers all over the United States are – continue to want to get in a K-Cup form.

So we continue to open up new opportunities and continue to have discussions and there is always a constant amount dialog about how do we maximize our potential with them and this would be an example as Vue or Rivo or other things become there it’s just something that we also like to see – I’m a big fan sometimes of being on the big difference between leading edge and bleeding edge. Sometimes they get too far in front of these things and you might not be something you want to be partnered with, so it’s okay for them to test some things just to get some of the learning curve out there and then we will come back in and help them with our product lines.

Howard Penney – Hedgeye Risk Management

Thank you.

Operator

Next we’ll go to Kevin Tracey with Oberon Asset Management.

Kevin Tracey – Oberon Asset Management

Hi, yes. I just had a couple of questions related to your K-Cup business. I guess in the last quarterly conference call you kind of explained the decline in sales being due to Green Mountain kind of repositioning your brand as a premium coffee and you lose in much of these Costco outlets. But I guess I’m wondering there have been reports now that Green Mountain’s patent has expired of Kroger announcing a K-Cup product and that Green Mountain has had to cut prices and competition is just getting more fierce. Could you talk about how that might be affecting your K-Cup business at all?

Tim Hennessy

Sure. Well we’ve always expected with the patent expiration that there would be other players that would come up with a K-Cup line or a line that would fit in the Keurig machine and that certainly is playing out and even the Green Mountain themselves have announced that they will be the private label manufacturer for the Costco line. And so all these things are events that we’ve anticipated and we consider those as part of where we feel our K-Cup brand is going.

And as part of – along with that is going to be different price points, no different than we have in bag coffee, and we feel confident in our brand and its stability to carry price points that it’s been at. And then on the Costco situation, we were anticipating the loss of doors that really drove some of our resetting of our 2013 – 2012 guidance. But we do foresee rebuilding that lost volume through other means. So as we look forward, brands matter and we feel we’ve got a great product in the K-Cup line.

Kevin Tracey – Oberon Asset Management

Okay. Thanks. And then I think, earlier this year I believe you renewed your agreement with Green Mountain Coffee, I believe it was for another five years. And I guess I was just wondering if you could explain the thought process why you guys thought it was advantageous to renew with Green Mountain, given their patent was expiring, that the potential perhaps you could partner with a different manufacturer and still control your brand distribution likely you do with your bag business?

Tim Hennessy

Well, the main driver is distribution. Green Mountain has just built over the years an incredible distribution system that has our brand in a K-Cup fashion at almost 70% ACD nationally, which is better than what we have on our own. They also have an credible distribution outside of the grocery channel. So that clearly was a key criteria for us. Also as a category leader, Green Mountain is going to demand a much greater share of shelf space in the grocery aisle in mass, and being a part of their licensed portfolio just naturally gives us a better edge in getting on the shelf than if we were going to go out and try and recreate that and obviously we’ve done a lot of modeling on our end as to what it would take for us to recreate the profitability, if we were to do K-Cups on our own, and the manufacturing of those, which is another, frankly, barrier in getting the level of distribution at a cost to be competitive on the shelf. And when you model all that out, it was a pretty easy decision for us to stay with the relationship that we had with Green Mountain.

Kevin Tracey – Oberon Asset Management

Okay. Thank you.

Operator

And that concludes our question-and-answer session. I’d now like to turn the call back over to Mr. Jensen for any prepared closing remarks.

Mike Tattersfield

But it’s Mike Tattersfield and thank you all for being on the call and really appreciate the time. And wish you all a very, very holiday season and look forward to catching up in the New Year. Thank you very much.

Tim Hennessy

Thanks, everyone.

Operator

And that does conclude today’s presentation. We thank you for your participation. And have a wonderful day.

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