Just as it did last quarter, Caribou Coffee (Nasdaq: CBOU ) continues to sacrifice profits in an effort to expand its presence in the very crowded coffee market. Management insists on sticking with its strategy of adding locations without much regard for improving operations at existing locations. Executives may claim the strategy will pay off in the long run, but if it doesn't turn a profit soon, it may not be around long enough to prove it.
For the second quarter, Caribou's total sales increased 11.1% to $62.8 million, and other sales, which include commercial customers, licenses, and mail and Internet sales, were up 48%. However, comps were just 1% higher as the company's revenue growth was attributed to the opening of 36 company-owned coffeehouses. Management is extremely pleased with its growth, particularly the launching of its domestic franchising program. However, with just 1% growth at existing stores, I wouldn't be in such a rush to add so many more.
The sales growth has done nothing to help Caribou earn a profit. Losses expanded in the quarter to $3.9 million, or $0.2 per share. The company is simply dumping all of its money into growing its business, increasing labor and marketing expenses.
I am fully aware that in order for Caribou to compete with the likes of Starbucks (Nasdaq: SBUX ) and even Peet's Coffee & Tea (Nasdaq: PEET ) , it must increase its presence in the market. However, if it's barely successful in existing locations, I'm not sure how adding more will benefit the company.
As the coffee market continues to become even more crowded with Dunkin' Donuts and McDonald's (NYSE: MCD ) continuing to gain in popularity, Caribou would be better served by differentiating itself from the competition. Until it can do that and grind out better results from current stores, I don't expect its performance to perk up.
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Fool contributor Mike Cianciolo welcomes feedback and doesn't own any of the companies in this article. The Fool has a disclosure policy.
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