Wake Up and Smell the K-Cup!

Where's Major Dickason when you need him?

Shares of Peet's Coffee & Tea (Nasdaq: PEET  ) took a nosedive Tuesday, triggered by Dunkin' Brands (Nasdaq: DNKN  ) and its highly dilutive secondary stock sale. Yeah, I know, that's like selling your car because your bike has a flat tire -- there's no reasonable cause-and-effect action going on.

But the dive went even deeper on Wednesday after Peet's reported its own results. Taken together, it adds up to an 11% two-day drop.

Flat year-over-year earnings on 14% higher sales in the third quarter was better than the average Street projection, but early guidance for the 2012 fiscal year came in a bit light. Management sees sales rising about 10% next year, driving earnings about 20% higher.

Results like that would simply extend the current growth rates for another year -- and Peet's is already a relative laggard in the coffee industry. Its 8.4% annual sales growth on a trailing basis is slightly behind the respective 9%, 12%, and 10% boosts seen by rivals Caribou Coffee (Nasdaq: CBOU  ) , Starbucks (Nasdaq: SBUX  ) , and Krispy Kreme Doughnuts (NYSE: KKD  ) . And then you have Keurig K-Cup owner Green Mountain Coffee Roasters (Nasdaq: GMCR  ) nearly doubling its yearly sales. Peet's just can't compete with numbers like that.

And the K-Cup is the not-so-secret weapon in this race. Peet's hasn't jumped on that bandwagon yet and seems to be leaving money on the table as a result.

What's worse is that the company doesn't seem to have any plans on joining the K-Cup crowd. The brand never came up in last night's analyst call; instead, Peet's hopes to drive sales with "a pipeline full of new, seasonally relevant flavors" throughout the year.

If you want to give Peet's management the benefit of the doubt, the Keurig craze just might turn out to be a fad after all. A long-lived fad, but still one destined to fade the same way I expect SodaStream International (Nasdaq: SODA  ) to fall by the wayside. And in that case, staying out of that market would make Peet's look smart.

But even then, I'd imagine that the company would recoup the investment in getting a K-Cup line up and running long before the machine goes out of favor. Personally, I don’t see a good reason not to do K-Cups right now.

Will Peet's ever wake up and smell the K-Cup, or will the company keep waiting for Major Dickason's charge that never comes? The only way to know for sure is to keep close tabs on the company. Our Foolish watchlist feature helps you do exactly that, and can even keep an eye on the entire coffee industry on your behalf:

Fool contributor Anders Bylund holds no position in any of the companies mentioned. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of SodaStream International, Starbucks, and Green Mountain Coffee Roasters; and creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Check out Anders' holdings and bio, or follow him on Twitter and Google+. We have a disclosure policy.


Read/Post Comments (6) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 02, 2011, at 4:07 PM, kidchicago2 wrote:

    The K-Cup actually did come up on the call. An analyst asked if PEET was going to follow the lead of Rogers and make a non-licensed K-Cup, and the company said they had "no news or comment" on that possibility. I read that as "no."

  • Report this Comment On November 02, 2011, at 5:00 PM, jeffgrace7 wrote:

    No mention in this article of the fact that Peet's went up against GMCR in a bidding war for Diedrichs. Aquiring Diedrichs would have bought them a license to produce k-cups. Obviously Peet's burned a bridge or is still bitter about this. They tried to compete...SBUX and Dunkin are going the coompetition route. Huge miss in my opinion not mentioning this here...

  • Report this Comment On November 02, 2011, at 10:01 PM, chadscards1274 wrote:

    Wow, first talk to people who own a Keurig the KCup isn't going anywhere. Why in the world would my wife for instance go back to making a pot of coffee in the morning which most would get thrown out and then she would have to make another pot in the afternoon if she wanted another cup, Hmmm...OR she could brew one cup on one flavor in the morning waste nothing and then brew another cup of any flavor she wants again without waste in the afternoon. To suggest this could be a long running fad is just shockingly ignorant of what a change the Keurig has brought.

  • Report this Comment On November 02, 2011, at 11:35 PM, CharlieTav wrote:

    Mr Einhorn should wake up and smell the K-Cup

    Long Green Mountain (GMCR)

  • Report this Comment On November 03, 2011, at 6:36 AM, TMFZahrim wrote:

    @MHenage, you guys are obviously right in the target market that can/might/will keep the K-Cup going. I'm not (prefer freshly ground, high quality beans and save money doing it that way) so maybe it's just hard for me not to think "fad." But hey, convenience is king, right? ...I need a cup of strong, black right now obviously...

    Anders

  • Report this Comment On November 08, 2011, at 4:37 PM, deathF1nger wrote:

    This writer is clueless... Tell him to put his money where his mouth is and short GMCR. I like to see him do that and back up his claim.

    To say keurig is a fad is crazy... Who brews coffee nowadays except at work?

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