Scary Caribou

By Alyce Lomax
August 6, 2008 | Comments (2)

Recs

8

Now here's a strange trend -- coffee companies that seemingly elicit far more optimism from investors than Starbucks (Nasdaq: SBUX). Is Caribou (Nasdaq: CBOU) the latest example?

Caribou's stock had jumped 27% when I checked it a few minutes ago -- of course, it's trading at around $2 a share, so that seemingly huge surge doesn't actually represent much. At any rate, Caribou managed to narrow its second-quarter loss to $2.5 million, or $0.13 per share, from a loss of $3.9 million, or $0.20 per share, this time last year.

Revenue increased an anemic 0.5% to $63.2 million, saved by "Other Sales," which increased by 68%. These represented commercial customers, royalties, and product sales from franchise cafes opened in the last year. Same-store sales decreased 1.7%.

Starbucks may be closing some stores because of lagging consumer spending and overexpansion, but Caribou's also shuttering some stores, even though you'd be hard pressed to accuse it of having overexpanded at all. The company has a total of 490 coffeehouses, and 75 of them are franchised locations.

I've long been bearish on Caribou. I can see why investors might be sweet on Peet's (Nasdaq: PEET), and find Starbucks a bargain at current levels. Green Mountain Coffee Roasters (Nasdaq: GMCR) stock has also been a winner, even though it's about beans and single-serve at-home brewing instead of sit-down coffeehouses.

Contemplating the universe of potential coffee stocks, Caribou scares me the most. Starbucks may have recently treated us to its first quarterly net loss, but that's old hat to Caribou. I glanced over its last five years of financial data, and Caribou has not reported an annual profit in that entire time. The news that it has narrowed its second-quarter loss is certainly better than if it had widened it, but to my way of thinking, that doesn't make up for the risk inherent in its historical lack of profitability.

Lots of companies serve as competitors in the battle to win consumers' coffee habits -- McDonald's (NYSE: MCD) and Dunkin' Donuts are in the fray, and of course, many of us forget old coffee standbys like Sara Lee (NYSE: SLE) and Procter & Gamble (NYSE: PG).

However, when it comes to hot coffee plays for investors' portfolios, I think Caribou could be the most likely culprit for investors to get burned. Watch your lap.  

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Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.

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  • Report this Comment On August 06, 2008, at 4:32 PM, JHeilicher wrote:

    Hey Alyce:

    Concider this;

    With a 40 million market cap, and 400 stores, that puts the liquidation value at about $100,000 per store owned.

    I would stand in line to buy up these stores at three times this number. Add the brand value and you could expect more.

    The bottom line will come as the stores mature and the G&A for expansion dwindle. Keep watching!

  • Report this Comment On August 07, 2008, at 3:11 PM, FoolishMadDog wrote:

    Some more things to consider,

    For the most recent quarter starbucks had net sales of 2.6 B and market cap of 10 B as of this post. $1 of sbux stock would give you $.26 of revenue.

    For the most recent quarter Caribou had net sales of 63 M and a market cap of 41M as of this post. $1 of cbou stock buys you $1.54 of revenue.

    Caribou has always been unprofitable, but that was also during a time of expansion. If they stop the expansion to lower G&A or find a way to expand profitably they could have a significantly worse margin than sbux and still be giving great P/E if you buy at today's levels.

    There is significantly more chance of insolvency with Caribou than Starbucks, but there is also very little chance of starbucks becoming a five bagger in the next five years. Caribou also currently has no debt so any solvency issues are a ways down the road with plenty of time to refocus on profitability rather than the current (and probably incorrect) focus on expansion.

    I'd never recommend putting a huge percent of your portfolio in Caribou, but there is some huge potential for returns in the next five years if you are willing to put up with the risk due to the incredibly low expectations of this stock.

    Minnesota is one of the areas Starbucks has disproportionatly closed a larger percentage of stores in and that can only help Caribou with their large percent of stores in Minnesota.

    Finally as a Minnesota native I totally get the Caribou concept and enjoy it much more than Starbucks. I enjoy their larger and better selection of Mocha's and Latte's, love the relaxed feel with leather sofas and free wifi. I've tried McDonalds Mocha's and Latte's and they are not even close to Caribou. I might get a mocha if I am already at McDonalds, but I don't see many people that go to coffee houses just for the coffee, stopping that behavior and instead making a trip to McDonalds just for the coffee.

    I saw this as a value and picked up some shares at $1.60 and while it may not last due to the risk and volatility of this stock I'm enjoying the current runup and hoping for more in the next five years.

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