Something’s Brewing at Caribou Coffee

By Michael Brush
Exclusively for InvestorIdeas.com
September 04, 2008

Republican delegates who have trouble staying awake during speeches at this week’s convention might want to check out a regional Starbucks (SBUX) rival known as Caribou Coffee (CBOU).

There are a few dozen locations not far from the Xcel Center where delegates are meeting. The coffee shops are scattered in around St. Paul and Minneapolis, which happens to be Caribou Coffee’s home turf.

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If Republican delegates do make it into a Caribou for a coffee, they’ll be enjoying the benefits of one of their major economic philosophies: Free trade.

Caribou prides itself in casting “roast masters” far and wide around the globe to bring back what they consider to be the best coffees – from places like Colombia, Costa Rica, Guatemala and Kenya.

I’m not sure Caribou Coffee timed the offering for the Republican convention, but the company also currently sells a coffee that would seem to represent another Republican core belief, family values. Caribou boasts a bean called Poco Fundo, discovered off the beaten path in southeastern Brazil where it is cultivated on family farms.

A big mess

Despite its efforts to bring you the best coffees from around the globe, Caribou’s business has been a horrible mess. Caribou has a return on assets of -28%, down from -9% a year ago, according to Thomson Financial. Earlier this summer, the stock traded at $1.50 a share, off over 80% from where it sold in late 2006.

The insider buying

But recently, the stock perked up to trade above $3. Not only that, insiders are buying significant amounts on the strength in the stock -- often an extra-bullish sign.

So far in August, insiders have purchased nearly $400,000 worth of stock. That’s a decent amount because this is a truly micro cap stock, with a market cap of just $59 million.

Granted, a lot of the buying was predictable because it was done by a new CEO – Michael Tattersfield – who agreed he would purchase stock after moving into the position, which happened in early August.

But then again, he might not have agreed to buy stock, or even taken the job for that matter, if he didn’t think he has a good shot at turning things around. Plus a portion of the buying came from directors.

So what’s next?

A big problem with following the insiders here is that it’s not yet clear how Tattersfield will revamp an existing turnaround effort at Caribou which hadn’t yet done much to stem the decline in the stock.

Unhelpfully, the company finished up the most recent conference call quickly after an analyst persistently invited Tattersfield to give his take on the lay of the land. He never said a word. In fairness to the company, he had only been on the job briefly at that point.

For what it’s worth, under the outgoing chief Roz Mallet Caribou has been closing underperforming coffee shops. And it has been selling more prepackaged beans and ground coffee through grocery stores and large club stores like Costco (COST), in what it calls its “commercial business.” The company has also been rolling out new fruit and tea drinks.

Despite trimming presumably among the worst 22 coffee shops through the first half of the year, sales in shops open a year or more still declined 1.7% in the most recent quarter.

In contrast, its “commercial business,” or sales of prepackaged beans and ground coffee through grocery stores, was up 67%. That big gain was off a small base, however. Sales through grocery stores advanced to $4.5 million in the second quarter, compared to $57.3 million in coffeehouse sales.

A decent record

Though it’s not clear what Tattersfield, the new CEO, will do now, judging by his record he may be a good candidate to bring some new zip to Caribou stock.

• Tattersfield spent thirteen years at YUM! Brands (YUM) where he worked to develop brands and franchises like Kentucky Fried Chicken, Taco Bell and Pizza Hut. Since the start of this decade, YUM! Brands has been no laggard. Its stock has gone up four fold.
• Tattersfield also recently did a stint at Lululemon Athletica (LULU), a hip retailer that sells sports- and yoga-oriented apparel. The company’s stock had a good run after its initial public offering last summer. But it has since been in the tank along with the rest of retail. It’s now hard to tell whether Lululemon was just a flash in the pan as a brand. But while Tattersfield was there it put in some decent growth.
• With Caribou Coffee, he’s working from a good base, because its stock looks cheap. It trades near book value and at just .23 times sales.

The bottom line: We don’t really know yet what Tattersfield plans for Caribou Coffee, and a cynic would say all of his recent buying was done simply because of a contractual obligation. On the other hand, he has a good record, the stock looks cheap, and the time to buy a successful turnaround is in the very early stages. For Caribou Coffee, that would be now.

Disclaimer
At the time of publication, Michael Brush did not own or control shares in any of the companies listed in this column. Mr. Brush is an independent columnist for this web site. For more on Insiders Corner disclosure, see the disclosure section in About Insiders Corner: http://www.investorideas.com/insiderscorner/. InvestorIdeas.com Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not affiliated or compensated by the companies mentioned in this article.

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