Something's Brewing at Diedrich Coffee

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Shares of Irvine, Calif.-based Starbucks (Nasdaq: SBUX) competitor Diedrich Coffee (Nasdaq: DDRX) jumped more than 11% in yesterday's trading following the announcement that the company agreed to sell the international franchise operation of its Gloria Jean's brand to Jireh International, its Australian franchisee, for $16 million in cash and $7.25 million in licensing and consulting payments to be delivered over six years.

The dollar value of actual change in Diedrich's market value wasn't much to speak of, but the percentage jump and much-higher-than-usual trading volume suggest that investors are watching Diedrich carefully -- and that they like the news, considering it is something perhaps akin to addition by subtraction. To understand why, however, a closer look at the company is worthwhile.

Diedrich has 316 international Gloria Jean's franchises, about two-thirds of them in Australia. (Its 146 domestic Gloria Jean's locations aren't affected by yesterday's news.) The company has seen its international revenues and store count grow very rapidly in recent years, particularly in Australia. More granularly, international franchise revenue grew in Diedrich's latest fiscal year (ended June 30) as both royalties and the fees paid for new franchises were up.

But the company's business was hurt last year as domestic closings at Gloria Jean's hurt results, domestic franchise royalties fell, and its same-store sales -- it has other operations, but Gloria Jean's is currently its main revenue source by a long margin, as our September story on the company noted -- were up less than 1%.

Given all this, it looks very much like Diedrich -- mindful of the fierce competitive landscape in the U.S., which besides Starbucks features Peet's Coffee and Tea (Nasdaq: PEET), Juan Valdez, Coffee Bean and Tea Leaf, local competitors, and others -- figures it needs some extra cash and extra revenue (both figures, particularly the cash payment, are meaningful given its books) as it turns to address business realities close to home. It's a bold bet that investors stood behind yesterday.

Fool contributor Dave Marino-Nachison doesn't own any of the stocks in this story.