Peet

123jump.com Staff
20 Feb, 2010
New York City

Peet

Peet''s Coffee & Tea, Inc. ((PEET))
Q4 2009 Earnings Call Transcript
February 17, 2010 2:00 p.m. PT

Executives

Patrick J. O’Dea – President and Chief Executive Officer
Thomas P. Cawley - Chief Financial Officer

Analysts

Matthew Leedon for Steve West - Stifel Nicolaus & Company.
David Tarantino - Robert W. Baird
Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co.
Gregory McKinley – Dougherty Investment Research.
Colin Guheen - Cowen and Company
H. Panero – Individual Investor

Presentation

Operator

Good day everyone and welcome to the Peet''s Coffee & Tea 2009 fourth quarter and year end results conference call. As a reminder this call is being recorded and we will be conducting a question and answer session after the presentation. With us today from the company is President and Chief Executive Officer, Mr. Pat O’Dea and Chief Financial Officer, Mr. Tom Cawley. For opening remarks I’ll turn the call over to Mr. Tom Cawley. Please go ahead sir.

Thomas P. Cawley – Chief Financial Officer

Thank you, Operator. First off I apologize for our release going out late. We had a problem with P. R. Newswire and some of the tables aren’t formatted very readably especially the last one but you have got our website and actually pull off the table in a clean version. We will be publishing an update to it later with a clean version of the tables. As I begin I need to inform you that the information being discussed in this conference call will include forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those projected in these forward-looking statements and Peet’s can give no assurance to the effect of these statements and we assume no obligation to update them.

For additional information concerning factors that could cause actual results to differ materially from those in our forward-looking statements, please refer to the section entitled The Risk Factors in the most recent annual report on Form 10-K for the year ending December 28, 2008, filed with the SEC on March 13 of last year. It’s also available on Peet''s website.

As you saw in our earnings release today in the fourth quarter we had some unusual items and this fiscal year has 53 weeks for us versus 52 a year ago. So, before turning over to Pat, I’d like to take this opportunity upfront to reconcile our results down to comparable 52 week numbers. So, we could spend the rest of the call talking apples-to-apples and you can understand our 2010 guidance from the proper base. For the fiscal fourth quarter and full year we reported $0.76 EPS and a $1.44 EPS respectively. Both of these numbers include $0.35 in unusual items which are explained in our press release and we’ll speak to later.

Excluding this unusual gain our EPS for the quarter and full year would have been $0.41 and $1.09. This compares to our previous guidance for the year of $1.04 to $1.06 that we gave on our last earnings call.

Now for appropriate comparisons as we trend our results across the years and into 2010, please note that the 53rd week this year was worth $0.05 of EPS. So, on apples-to-apples 52 week basis this year would be about a $1.04. This is the base we are referring to when we say we expect to grow EPS in 2010 in $1.24 to $1.30 range or about 20% to 25% growth. Hopefully that brief reconciliation helps. From here on now the financials that we will speak to will be on a comparable 52 week basis excluding the $0.35 of unusual items to give you the best and most representative view of our operating results and you can also see this in our press release.

If you go to our website, on the page referenced in our press release right below the tab you click to hear this call you’ll see a non-GAAP P&L that compares 52 weeks of 2009 without unusuals compared to 2008. You might find this view helpful as we comment more broadly on the financial results.

Now I’d like to turn it over to Pat.

Patrick J. O’Dea – Chief Executive Officer

Thanks, Tom. I’d like to highlight a few overall takeaways from our fourth quarter and full year performance. First, our performance in the quarter and for the full year reflects our ability to grow earnings well in excess of sales which we believe will remain through for at least the next several years. On a comparable 52 week basis we ended the year with just over 7% sales growth while operating income and earnings per share both grew 30%. This performance was driven by continued strong direct store delivery grocery growth, significant margin expansion in our retail stores and more effective and efficient people, systems and processes steering our entire business. In summary we built the capacity to grow and the capability to produce strong earnings growth as we do so and we are getting better and better at the things we already do best.

Second, the growth rate in our consumer package grocery business strengthened considerably as the year progressed and I see this trend continuing into 2010. Most notably, this has been driven by accelerating growth rates on the Peet’s brand in existing grocery customers. Much of what we expect from the launch of the Godiva brand through our existing DSD system and later directly shipped to mass merchandisers, club and drug customers is yet to come. I’ll speak more to this in a moment.

Third, our retail stores are performing at a much higher level today than at any time in the past and looking forward I’m almost optimistic about our performance. Over the last 18 months or so as the economy entered the recession, the top line performance of our stores remained remarkably stable. At the same time our management team has strengthened our operation which contributed significantly to the margin expansion we experienced in our retail stores during 2009. Looking forward, I’m encouraged as we have several top line initiatives planned to impact this business in the second half of the year.

Overall, I believe we are well positioned to deliver this year and based on where we stand today we would expect to come in more toward the mid to higher end of our $1.24 to $1.30 EPS guidance or about 20% to 25% EPS growth on a comparable 52 week base.

I should point out however that this guidance excludes any one time legal and related expenses associated with complying with the subpoena for information we recently received from the Federal Trade Commission in connection with GMCR’s proposed acquisition of the Diedrich Coffee Company. While it is very difficult for us to take timing or costs on this, publicly available data indicates the average length of a second request from time of filing HSR or Hart-Scott-Rodino to the end of the process is on average seven months and varies from three to 12 months. While we are not the subject of the second request from the FTC the subpoena for information that we received was significant in scope. So we anticipate this entire process could take quite a while and might involve some significant expense. So, we are calling it out here.

Now let me shift gears and provide some prospective on our performance by channel in the quarter and full year. I’m very pleased with our grocery performance and excited about what I see looking forward. We started the year off in the thick of the recession growing just 10% in the first half of 2009. We made some important adjustments to accelerate our growth to plus 24% in the third quarter and in the fourth quarter our growth rate increased again to plus 30% on a comparable 13 week basis. The majority of this growth comes from continued strong share growth of the Peet brand. For prospective for the 12 weeks ending December 27th, 2009, IRI reported Peet’s brand coffee sales increased plus 25% versus a year ago. Importantly in the western U.S where we have essentially been in the same number of grocery stores now for over five years, Peet’s grew plus 24% in the fourth quarter and 20% for the full year. We grew at an even higher rate in the Eastern U.S. This ability of the brand to grow year in and year out in existing distribution in the 20 plus percent range is a testament to the quality of the coffee, the strength of the brand, the superior sales and merchandising capability of our DSD system and the effectiveness of our targeted marketing. This is the reason why when anybody asks me what our future major growth initiatives are I usually lead off with the Peet’s brand in grocery.

We also started to ship Godiva in the fourth quarter. However most of this new distribution will occur during 2010 based on customer timing for reselling their stores shelves. For prospective at the end of the fourth quarter IRI reported 17% ACV Godiva coffee distribution. As I look forward with half of 2010 first quarter already behind us, I see our grocery business continuing to strengthen behind continued strong Peet’s brand share growth and the addition of new Godiva distribution during the year.

Our retail business performed in line with our year-to-date trends while continuing to deliver strong operating margin improvement. Retail sales grew 4% in the quarter with our existing stores performing slightly better than the first three quarters. We opened one store in the quarter for eight for the full year. We continue to drive operating margin improvement in retail in line with our plan as operating margins expanded over 250 basis points in the quarter and for the full year. I’m optimistic about the performance of our retail business moving forward. Operationally we are performing very well and we’ve a number of top line initiatives planned in 2010 including the installation of coolers in about half our stores, a rejuvenated big goods merchandising program and a host of new special offering Bean and Drink News throughout the year.

Rounding on our channel specific comment our foodservice and office business grew 10% in the quarter and 8% for the year driven primarily by the opening of seven new licensed locations during the quarter, 25 for the year and a total of 93 today. Our direct business to client grew 4% which is slightly better than our expectations.

Now, I’ll turn it over to Tom to talk the quarter and the year and the financial outlook for next year.

Thomas P. Cawley - Chief Financial Officer

Thanks Pat. For the full year we grew sales 7% while we grew operating income 30%. This is second straight year we’ve had 30% or greater operating income growth. We were able to grow earnings at this rate by improving our operating margins from 6% to 7.2%. The margin improvement for the year was driven by a couple of factors which we expect to continue into 2010. First we drove a 270 basis point improvement in total retail margins by focusing on improving the profitability of our existing store base, opening just a handful of quality new stores and leveraging our overhead structure. To highlight the focus on improving margins on existing stores, for stores that were opened prior to 2007 we drove a 210 basis point improvement in four wall operating profit margins. We have now realized in the margin enhancing benefit of the operating, training and IT systems we put in place over the last few years.

Second, as Pat explained earlier we continued to drive strong growth in the high margin consumer packaged specialty business led by grocery. In 2009, this business comprised 35.4% of total sales versus 34.1% last year. Since these margins are 18 points higher than retail, this improves overall company margin.

Third, we continue to get more out of the investments we’ve made, in the plant new ERP systems, and other systems related to our stores and direct store delivery network. And this will improve our returns on capital and lower our CapEx moving forward. As a result this year we generated about $40 million of cash from operations and invested only $15 million in CapEx for a net $25 million in cash flow and this is before the net $7 million in after tax cash we received related to our fourth quarter acquisition efforts.

Next year our business will continue to generate cash at or above these levels. This puts us in a good position to take advantage of our strategic growth opportunities beyond what is already on our plate in 2010.

Now I’d like to provide some color commentary on the line items within the P&L for the year and how we see them playing out in 2010. Gross margin was up a 100 basis points this year. About half of that was commodities, as milk and fuel prices were favorable while coffee was unfavorable. The rest was waste savings and efficiencies in the plant and freight. In 2010, we expect gross margin to be about flat as commodities will be slightly negative due to higher milk offset by plant and freight efficiencies. Operating expenses for 2009 were 70 basis better, driven by numerous retail improvements and a favorable mix switch to the consumer packaged specialty business. This will continue into next year and we should be able to improve by another 70 to 100 basis points. G&A was flat as a percent of sales in ’09 and that should continue. Depreciation should leverage slightly unlike this year when we saw an increase as a percentage of sales due our ERP investment. Net-net we are expecting to improve operating margins in the range of 100 basis points. Our sales growth will be in the 8% to 12% range, retail will grow in the low to mid single digits while the consumer packaged specialty business should grow at 20% plus growth driven by grocery.

From a timing standpoint, we expect our profit growth due to later quarters with the growth improving as the quarters progress. If you remember last year in Q1 we were up 57% over 2008 which was unusually high due to timing of expenses and reversed itself somewhat in later quarters. We don’t expect that same Q1 favorable timing impact this year so our EPS growth will likely be more flattish in Q1 with progressively more growth each quarter after that.

Now, I’ll turn it back over to Pat.

Patrick J. O’Dea – Chief Executive Officer

Thanks Tom. In closing I’m very pleased with the results our people achieved this year despite a challenging economic environment and we certainly finished out the year strong. The full year $1.09 EPS exceeded our most recent guidance of $1.04 to $1.06 and far exceeded the $0.94 to $1.00 we expected when we started back in January. On a comparable 52 week basis we grew operating income 30% on top of 30% growth a year ago. We improved our retail margins 270 basis points and our consumer packaged grocery business growth accelerated every quarter with the fourth quarter up 30%. Net-net we’ve entered 2010 with good momentum on the business, a healthy plate of consumer packaged and retail growth initiatives and a very strong balance sheet for opportunities as they arise. That’s all of our prepared comments. Operator, you can now open it up for questions.

Question-and-answer session

Operator

Thank you sir and ladies and gentlemen to ask a question at this time please press * then 1 on your touchtone telephone. If your question has been answered or wish to remove yourself from the queue please press the pound key. Again ladies and gentlemen to ask a question at this time please press * then 1. Our first question in queue comes from Steve West with Stiefel Nicolaus. Please go ahead.

Matthew Leedon for Steve West – Stifel Nicolaus

Yes. This is Matt Leedon here for Steve. I guess first question is do you expect to continue to see the margin improvement in the retail business as the stores continue to mature and I guess you talked about that a lot recently and it sounds like the results were there but with I guess the more recently opened stores, do you continue to expect that and what is your basis to continue to improve?

Thomas P. Cawley

Matt, this is Tom. Yes we do expect retail margins to continue to improve. We have made obviously a huge stride this year in improving margins and so I think if you trend out three year plan we can continue to do what we did this year but margins should improve in retail as we move forward as long as we continue on the current opening trend that we are on right now as we have opened only a handful of stores.

Matthew Leedon for Steve West – Stifel Nicolaus

Okay and then I guess switching gears there to the grocery side of the business you have a lot of easier comp here in the fourth quarter and first quarter has it benefited at all because we saw the same thing from the other players in the market last year I guess at this time and channels were a little slower in growth. So, should we expect to continue to see high 20% growth in the grocery business? Is there any reason you should fall down I should say.

Patrick J. O’Dea

So as I mentioned earlier we definitely have some momentum on this business and we expect it to continue into 2010. We grew 10% in the first half last year and 24% in the third quarter, 30% in the fourth quarter and we’d expect that first half of this year it will look more like the fourth quarter or better in terms of growth rate. So, I am not sure if that answers your question but…

Matthew Leedon for Steve West – Stifel Nicolaus

Yeah that answers it and I guess just one final question then. How much impact from Godiva is included in the $1.24 to $1.30 guidance for 2010?

Patrick J. O’Dea

I don’t think we have it broken out quite that way. Will it answer that?

Thomas P. Cawley

Yeah I think when we look at our total business in leveraging the DSD system we are not going to get into the habit of braking out earnings per share for the brands that we have in the business.

Matthew Leedon for Steve West – Stifel Nicolaus

All right I guess then to sort of clarify, is there some positive impact included in the guidance from Godiva or are you expecting it to be kind of break even for 2010?

Thomas P. Cawley

Yeah there is positive impact from Godiva.

Matthew Leedon for Steve West – Stifel Nicolaus

Okay thank you very much.

Operator

Thank you. Our next question in queue comes from David Tarantino from Robert Beard. Please go ahead.

David Tarantino - Robert W. Baird

Hi good afternoon. A question on the single comp market and your strategy related to that given the development that has happened with the Diedrich acquisition. I guess the key question is are you still interested in pursuing that market and at this stage what options do you see?

Patrick J. O’Dea

Yeah obviously we are interested in the market as it develops, relatively small right now but we look forward in the next three to five years we think an important enough market that we made the bid that we did in the fourth quarter. It remains to be seen how the anti-trust investigation that’s occurring now will play out. Obviously we have our tender offer out there and we’ll see how that situation plays out. And beyond that we are not going to have any more to comment on that right now.

David Tarantino - Robert W. Baird

And then just a follow up on the anti-trust proceeding, what exactly is your involvement in that other than providing information. I guess if you could clarify what exactly is going on there?

Patrick J. O’Dea

Okay. An anti-trust review of the proposed GMCR acquisition of Diedrich is being conduced by the FTC. We’ve received a subpoena for information from the FTC in connection with their investigation. We’ll comply with that subpoena and any future request for information that they make of us. It is difficult for us to estimate how much time that entire process will require from us. The only reference points we have comes from historical data contained in the most recent Hart-Scott-Rodino annual report that was issued by the Department of Justice from the Federal Trade Commission that covered 2008 which is publicly available on the web and also 2007 American Bar Association’s Survey which was done in response to a request from the Antitrust Modernization Commission. The latter indicated that the length of the second request from the time of filing the HSR process to the end of the process is on average seven months and varies between 3 to 12 months. So, based on the publicly available historical data on antitrust reviews that receives a second request like this one did, as well as the breadth of the subpoena we received, we expect this can take quite a while and therefore it might involve some significant cost to us which is the reason why we called it out. Additionally we’d also likely report these expenses in a non-GAAP disclosure where just like we did with the gain that we had this year.

David Tarantino - Robert W. Baird

Okay and then one quick follow up on that. I mean what degree of management bandwidth is going to be involved with that review? Is that going to be a major distraction as you think about the next six months or so?

Patrick J. O’Dea

No, not for us, because we received a subpoena for information, not a second request, very different in magnitude.

David Tarantino - Robert W. Baird

Okay that’s helpful and then last question on the guidance for 2010, you held the range despite coming out above the range in Q4. I know you are pointing toward the upper end of that range now but is there anything else to read into that, incremental costs or you are just being conservative at this stage?

Patrick J. O’Dea

No, I think internally in the game it looks good. It looks good enough for us to say that I think will be in the mid to upper end of the range but it is early in the game and I think our sort of record on guiding speaks for ourselves and that’s where we feel comfortable at this point.

David Tarantino - Robert W. Baird

Very helpful good luck.

Operator

Thank you. Our next question in queue comes from Matt DiFrisco from Oppenheimer. Your question please?

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Yeah this is Jake Bartlett in for Matt. Just a quick question on the grocery just want to confirm that you didn’t add any new stores in the quarter to about 8400 stores and grocery channel?

Thomas P. Cawley

That will be about accurate yes.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay and then what is your expectation for going forward in 2010 for new distribution there.

Thomas P. Cawley

Very little. New store distribution obviously as we gain distribution on Godiva that will be a lot of new stores for that brand but for the most part our growth is coming from continuing to build our share in existing stores and as I pointed out in the script and I know this is sometimes hard for people who track retailers in new models where you show store growth as a key to growth, we have been in the western United States in the grocery now in the same amount of stores for well over five years and year in and year out we’ve been delivering over 20% growth, 20% plus growth in existing stores. So, the combination of the quality of the product, the strength of the brand and the power of the direct store selling delivery in the merchandizing system as well as the targeted marketing efforts are yielding year in year out 20% plus percent growth in existing grocery stores just on Peet’s. And that’s in western U.S. Obviously the growth rate is higher in the eastern U.S where we have much more base. So, most of it is going to come from existing stores.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay and just kind of to that, I am impressed with that 20% growth in the western markets there and you have been there for a while, how are you driving at it? Your DSD representatives or sales guys are they doing anything different now to help drive that or in terms of marketing you are doing anything different to drive that kind of growth in the rest of the mature markets?

Thomas P. Cawley

Yeah sure, so in mature markets, in all of our markets, our direct store delivery sales people perform three basic functions that no other competitor performs because we are the only one with the direct store delivery sales organization. The first is getting superior fresh product to the shelf properly rotated etc. The second is performing selling and merchandizing directly with the trade customer, in this case the store manager to get incremental displays and preferred merchandizing as a result of being in the store one to four times a week and then third and this is really important in underdeveloped geographies in particular, all our direct store delivery sales people are highly coffee trained and also trained with tools to engage customers in the store to introduce the brand to them which is a very impactful way for us to get new customers, much more impactful than what traditional advertising would be as you might imagine. So, a combination of all of those factors along with all the good blogging and tactful management has to do with how you promote the targeted marketing efforts that we do, pricing management etc, etc. It is the combination of all of those things that enable us to grow at a high rate and don’t share against much larger competitors.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay helpful and just moving to the retail side and this is kind of bookkeeping, I am trying to figure how many operating weeks were in the quarter or you could average weekly sales but given the closings just want to be accurate on that?

Thomas P. Cawley

All the closures happen the last weekend of the year. So, you can probably back in that pretty accurately with that.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay. In four commodities are you locked in for 2010, for most of the major commodities as you have given the guidance?

Thomas P. Cawley

Yeah. We are locked in for coffee. We have 88% of our coffee requirements for next year we have locked in at a price that’s about 1% lower on a year-over-year basis. We obviously don’t lock in milk. We move that with the market. So, coffee is the only thing that we have locked in for.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

And then lastly, the four stores that have closed how much did they help? Will they help make a meaningful material impact on margins going forward and did they make any impact in the fourth quarter? It doesn’t sound like much given the…

Thomas P. Cawley

Yeah, it is not it is like a huge…I mean it is four stores and they weren’t doing so badly that they will make a material impact in the total year for us going forward or anything.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay and I guess this question was kind of asked because I wanted to see if I understand the answer but most of your stores…we are kind of moving towards having the vast majority of stores being over three years old. So, I am trying to gauge how much of the boost of margins going forward is going to be from that, from just that maturing of the system or is that plateau? Do you think it is pretty much plateauing in 2010 or 2011 and are they just maturing in fact on margins?

Thomas P. Cawley

I’d say at an increasing or a decreasing rate sort of from a margin standpoint. I mean this year obviously with 270 basis points we got a lot of it and that’s how we are probably ramping margins quicker as we have fewer stores opening because we are getting just better at it. So, there is still some left but we have got a lot of the margin improvement from that.

Jake Bartlett for Matthew DiFrisco - Oppenheimer & Co

Okay thank you very much.

Operator

Thank you. Our next question in queue comes from Greg McKinley with Dougherty. Please go ahead.

Gregory McKinley – Dougherty Investment Research

Yeah thank you. When you look toward 2010 could you talk a little bit about your capital spending plans and how you are going to be spending that money where you see an opportunity to invest and get some good returns from the business?

Thomas P. Cawley

Yeah our capital forecast right now is around $12 million and that is not including kind of new initiatives that you won’t be aware of right now. So, if something were to come up or we were to go into something which will be incremental to this so this would be opening a handful of stores, or remodeling existing stores. We have some new packaging lines that we are going to be putting into our plans as our grocery volume has grown. So, it is pretty business as is usual just aiming for the growth that we are having in the grocery business and making sure that our retail stores still deliver appropriately. As far as what we have available to us, next year we should be generating a very large, a significant portion of the cash just like we did this year. We do have of course the $50 million and as we look at other opportunities to grow this does kind of give a dry powder if an opportunity is out there for us to move into it, a channel where you can deliver within your infrastructure with another business.

Gregory McKinley – Dougherty Investment Research

Yeah when you look at the grocery channel you talked about relatively stable doors if you will in that channel in 2010. What type of developments are you looking forward for your business to expand or what you think is the right number of doors to be in? Is it building a larger product base or having success with another brand or you have enough volume to get into some of these markets that are maybe a little more powerfully to you or maybe just walk us through your thought process there?

Patrick J. O’Dea

Yeah so let me start at the top here to capture the essence of our overall strategy here, what our intent is to take the strength that we have including the extra delivery selling and distribution system and leverage them in a way that enables us to establish the leading premium quality, premium priced specialty coffee brand in every major consumer segment we see. So, Peet’s is at the high end of the deep roasted coffee and we are continuing to build share on peet’s toward our goal making that the national specialty coffee leader like it is here in the bay area, in California and then increasingly strong in the western United States. So, that’s our # 1 most important growth initiative. The second is establishing Godiva as the premium quality, premium priced flavored specialty coffee and of course there are other segments and that’s obviously the Godiva business is all about new distribution here in 2010 through the existing direct store delivery system and then obviously there are other segments that we will play that strategy out in which we haven’t discussed probably at this point, though obviously with our acquisition that we did in the fourth quarter of ’09, one of them we believe will be Single Cup as well, and there are others.

So, that’s the basic strategy we are following. Now the direct store delivery selling and distribution system today operates in only about half of the all commodity volume of grocery stores in the United States but represents about two thirds of all specialty coffee consumption. So, we are fishing further where the fish are through the direct store delivery system. We are going to build Peet in there. We are going to put Godiva in there and then beyond that particularly with Godiva as I mentioned in the script we’ll develop some new business in places like mass merchants, club and drug stores where we can direct ship Godiva and don’t have to use the direct store delivery distribution system in that situation nor would it be in our interest to do so. So, that’s another growth initiative. So, the combination of all these factors especially when your base business is going into fifth, sixth year of growth in existing stores at over 20%, it is fairly significant and as Tom mentioned we are in a good position to add to that with new initiatives to set the strategy because of our cash position.

Gregory McKinley – Dougherty Investment Research

Yeah okay, and then one just last question, regarding your 2009 guidance when you issued that, I am assuming it did include the cost of closing stores. I guess I have always sort of viewed store opening and closing as it passes as part of core operating results and I just want to confirm that, that was excluded from your guidance initially when you provided it?

Thomas P. Cawley

Yeah it was. We only closed two stores in the last ten years. So, for us it is fairly unusual.

Gregory McKinley – Dougherty Investment Research

Yeah okay, thank you.

Operator

Our next question comes from Colin Guheen from Cowen. Please go ahead.

Colin Guheen – Cowen & Company

Just a housekeeping question, Tom what is the ending store count for the year?

Thomas P. Cawley

192.

Colin Guheen – Cowen & Company

192 and where would you, I may have missed that, the store closures expense was in what line item?

Thomas P. Cawley

Store closure expense went into operating expenses for the retail segment.

Colin Guheen – Cowen & Company

Okay and the before tax on that was?

Thomas P. Cawley

It is in the reconciliation in the press release.

Colin Guheen – Cowen & Company

Okay before tax numbers, okay.

Thomas P. Cawley

Yeah the table that got the stuff in the press release has a full reconciliation of each line item that you could actually get on our website, a nice pretty version of it. Just to answer your question pre tax is $1.1 million.

Colin Guheen – Cowen & Company

$1.1 million pre tax okay, thanks.

Thomas P. Cawley

Which includes the lease liability and store write off, just to kind of maybe to correct you we ended with 192 company owned stores and 93 licensed stores.

Colin Guheen – Cowen & Company

Sure great and it sounds like the company is going to build cash for the foreseeable future to execute on its growth plans.

Thomas P. Cawley

Yeah we haven’t yet communicated any plans to use the cash.

Colin Guheen – Cowen & Company

Okay no more buybacks or any returning of cash in the next year.

Thomas P. Cawley

We do still have some buyback out there. It was approved by Board of Directors that we are not required to do but we are able to do if we so choose.

Colin Guheen – Cowen & Company

Okay and can we kind of go over the dynamics in the growth in kind of breaking the op between there, the two hosts or some commentary there?

Patrick J. O’Dea

I think in the beginning of 2009 as we had talked in the past there was a lot of deep discounting occurring off of artificially high prices. The prices got corrected pretty much across the board by the grocery trade at about mid year. Some people remained out there a little bit high but we got our strategy we think right and as a result we are able to grow nicely in the second half of the year. We haven’t seen the kind of deep discounting on a sustained basis that we saw in the beginning of 2009. I think most of what you are seeing now is people getting everyday price right at both competitors and the grocery in terms of the margins they are taking, the prices they are charging consumers and it seems to be more in a steady state now than it has been in the past. I think it makes sense where it has flushed out. In some cases it has taken a full year to get there.

Colin Guheen – Cowen & Company

It seems that you have strong growth in the west coast but what are the goals in 2010? Is it to drive more brand awareness or what are some of the strategies there that are going to be employed in the east coast

Patrick J. O’Dea

Obviously we have the full gamut as you can imagine so we have some fairly virgin territory for the brand where our shares are relatively small and the emphasis of our marketing plan are spending and the way that we utilize our direct store delivery of sales and merchandizing of course is quite a bit different than they are across the country in the market like the bay area. So, just for example we might have a couple of share points in a place like Florida and then at the same time in a place like the bay area I think the most recent 12 week period we were up to about 32% share of total coffee. So, in the western United States in a lot of markets it is just about getting around and presuming the demand as operationally effective as possible and the direct store delivery sales organization doesn’t do a lot in terms of its trial building activities. In eastern United States our direct stores delivery sales force and our marketing efforts are much more geared toward developing trial in the stores and directly with consumers. I think you can see in some of the markets like Baltimore, Washington, and in New England where we have these efforts under way our share and our progress is growing quite dramatically.

Colin Guheen – Cowen & Company

Do you still count the Peet as a national brand and versus maybe acquiring other regional brands to augment portfolio?

Patrick J. O’Dea

No, yeah without a doubt Peet’s is the national brand. I think we decided that about three years, three four years ago when we went east in New England and we are all in right now covering two thirds of the specialty coffee market with Peet’s and with the growth that we are experiencing and I think it is going to be the gift that we keep giving for quite a while here because we have got a lot of growth in tarmac ahead of us. And so as I said before the strategy for us in consumer packaged coffee here is to have the leading premium priced, premium quality brand in every major segment. And Peet’s we are plugging away with that at the high end of deep roasted coffee. Godiva is going to be our flavored entry and everything we do will be national and it will be designed to achieve that leading premium quality premium priced brand in every segment strategy.

Colin Guheen – Cowen & Company

Do you foresee Peet’s ever moving into the mass channel after you get some experience working at the mass channel with Godiva? Is there any possibility that the mass channel can handle your freshness requirement on the Peet’s brand?

Patrick J. O’Dea

Yeah there is. Actually and I should mention we do have some testing going on with Target right now through their fresh product distribution, their own fresh product distribution system where we are in some Target stores in test and performing very well. So, yeah there is that opportunity. There is also that opportunity for Godiva across the board.

Colin Guheen – Cowen & Company

Okay and is there any chance of licensed stores in the mass channel similar to some of the things you have done in the market?

Patrick J. O’Dea

Yeah it is possible but it is not likely. I think we’ll probably add a comparable number of new licensed stores this year. We did last year I think we added 25 capacity and will probably add another 20 to 25 this year and that’s a pretty lumpy business. When you score, you can score big and when we say 25 that’s what we know we’ll do and it is possible we could do better.

Colin Guheen – Cowen & Company

Okay great, thanks for the details.

Operator

Thank you. Our next question in queue comes from H. Panero. Please go ahead.

H Panero

Hey good afternoon. Couple of questions, first in your guidance the 8% to 12% revenue growth how much of that is pricing?

Thomas P. Cawley

None. We haven’t any pricing in 2009 and none expected in 2010.

H Panero

Okay. You do not expect to have any additional store growth for the core Peet’s brand. So, you are in two thirds of ACV in specialty coffee in consumption area. Why wouldn’t you seek taking things to grow? What’s the cause for?

Patrick J. O’Dea

Yeah so, with direct store delivery selling and distribution system it is very important that we sort of fish where the fish are and build scale. So, when we are in 45% of all commodity volume and that represents two thirds of the category, there remains the other half of the 45 building to 90 only represents a third of the category. So, you are talking about geography where specialty coffee is very underdeveloped and the volume opportunity for us is a lot smaller. It makes a lot more sense for us strategically to build our share in places where the category is well developed and where the volume is. It is more profitable and there is higher likelihood for success in doing it that way first than to enter relatively underdeveloped geography and battle it out for a very small price. Obviously as the specialty coffee category continues to grow and I think it is growing back up in double digits again now, it maybe a third of the category in total U.S but when it becomes mainstream then some of those new geographies will move into. We are not just planning to move into any of them in 2010.

H Panero

And I assume you would not consider a third party distributor to move in? Obviously DSD is expensive. Is that at all considered?

Patrick J. O’Dea

No it is not because everything we do, the roasting facilities that we have built which is the only roasting facility of its kind in the United States, the direct store delivery selling system and the premium price, superior freshness and quality of the coffee all work together and the selling and merchandising system is very powerful. We will be much more successful driving our share on Peet’s and then launching new items in new segments like the flavored coffee and Godiva in the flavored segment through direct store delivery system, than whatever comparable resource effort we might put against some new geography through some new distributor. It is a question of resource allocation and strategy and where we think we get the most bank for the resource and dollar buck and that’s the thinking.

H Panero

Okay. I know that Godiva was launched very late in the fourth quarter but did it all contribute in revenue in the quarter?

Patrick J. O’Dea

Yeah pretty small a $1 million range maybe something like that. So, pretty small. Most of that is going to come in 2010.

H Panero

And the coffee resets in when very typically?

Patrick J. O’Dea

It varies customer by customer and by geography and it is a big deal and so we are aware of the different customers timing.

H Panero

Okay Tom, the EPS for the fourth quarter kind of flattish for the reasons you have already outlined, and with the sort of growth you are having wouldn’t the fourth quarter have a tough comp in 2010?

Thomas P. Cawley

Yeah everything I was talking about is just featured in 52 week basis. So, you are right it will have a tough comp because of all the unusuals and if I am assuming everybody is going to restate 2009 to be a 52 week and in that case Q4 actually will have the highest growth.

H Panero

Okay that’s helpful. The last question, on the subpoena What exactly would the FTC be requiring from Peet’s?

Patrick J. O’Dea

The FTC is doing their own antitrust investigation and they can request information from any party that they believe would be helpful in the investigation. That’s all I can say. So, it could take some time and end up a little bit of the money we made the cash we made in the fourth quarter we called out.

H Panero

Okay it just seems, I talk to investors, I talk to consumers, I talk to lot of people. It seems the odds don’t seem in favor of the FTC ruling against the merger from the standpoint of…there are a lot of different aspects to it but certainly I could clip my Peet’s coffee in any curing system. So, it is not having a cake but not precluding anybody having Peet’s and so I don’t want any other type of coffee. It seems to me more of a bargaining ploy and using shareholder dollars to comply with the subpoena, most of the bargaining ploy may work your way into the curing system. I want to hear your color on why the use of shareholder money to spend on the attorney fees?

Patrick J. O’Dea

Yeah so, let me be very, very clear. We are not in control here. The FTC has issued us a subpoena. We would comply with it as we would with any subpoena issued by a government authority like that and that’s it. I can’t comment beyond that.

H Panero

Okay. That’s all I have. Thank you very much.

Operator

Thank you and it appears there are no other questions. I would like to hand it over to Pat O’Dea.

Patrick J. O’Dea

That’s it for us operator. Thank you for joining us today and we appreciate it.

Operator

Ladies and gentleman this does conclude today’s call. Thank you for your participation and have a wonderful day.