Shares of Peet's Coffee & Tea (NASDAQ:PEET) are up more than 15% since the company announced fourth-quarter earnings Feb. 13. Of particular interest was the news that "specialty sales" -- sales of whole-bean coffee shipped directly to the consumer or through third-party distribution channels such as grocery stores -- grew 31% to $10.5 million for the quarter. That's important, because Peet's specialty sales make up 30% of total revenues.

Peet's coffee is now available in more than 2,700 grocery stores, roughly 1,000 more than in the same period last year. It uses its own direct-store delivery system to ensure that the coffee customers buy in their local grocery stores meets the company's reputation and standards for quality and freshness.

Peet's coffee can be found in a wide range of grocery stores, including high-profile outlets, such as Whole Foods Market (NASDAQ:WFMI). Grocery store sales, which make up the bulk of Peet's specialty revenues, in the fourth quarter were up 92% year over year, and full-year grocery sales were up 115% over 2002's numbers.

In addition, the company announced that its board had approved repurchases of 1 million shares, or 7.7% of the shares outstanding. With $43 million in cash and no long-term debt, the company's balance sheet is in great shape, and management is demonstrating its willingness to return cash to the shareholders.

Three years ago, market leader Starbucks (NASDAQ:SBUX) began to move away from its original strategy of driving growth by investing its own capital in company-owned stores. It now has 1,500 licensed stores in airports, supermarkets, and even casinos. While this move has fueled rapid top-line and bottom-line growth, it may make maintaining standards of product and service quality significantly more difficult.

Peet's, on the other hand, is committed to growing its store base with only company-owned and operated stores. The company operates 75 locations, and wants to open 15-20 more stores in 2004. It has a loyal following of "Peetniks" (the first Peet's coffee shop was, after all, opened in Berkeley in the 1960s), who insist that Peet's coffee is better than the coffee found anywhere else.

With most investors focused on Starbucks, Peet's is trading at a more attractive valuation than its larger competitor. Peet's stock is currently priced at 1.96 times sales and 2.46 times book value, compared to Starbucks, which is more richly valued at 3.37 times sales and 6.51 times book value. With only 75 stores (to Starbucks' more than 7,600) and just $115 million in revenues, the growth potential for Peet's is arguably much greater than it is for Starbucks, which is now almost 40 times larger (on a revenue basis) than Peet's.

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When he's not in the mountains hiking, biking, or skiing, Fool contributor Salim Haji writes about stocks from his home in Denver, Co. He does not own shares of Peet's or Starbucks.