Peet’s Coffee & Tea Inc. (PEET) registered second-quarter earnings (excluding certain one-time items) of 31 cents a share, exceeding the Zacks Consensus Estimate of 29 cents by 6.9% and year-ago earnings of 26 cents by 19.2%. The better-than-expected results came in the wake of net sales growth and increased operating margin.

Revenue and Margins

Net sales recorded a growth of 9.8% to $80.8 million from $73.6 million in the year-ago quarter, but slightly missed the Zacks Consensus revenue estimate of $81 million.

Peet’s operating income rose 25% to $6.7 million in the quarter compared with $5.3 million in the prior-year quarter. Operating margin advanced 110 bps to 8.3% in the quarter from 7.2% in the prior-year period.

Segment Details

Sales grew 4% in the Retail segment to $50.6 million, and 22% in the Specialty segment to $30.2 million, compared with $48.8 million and $24.7 million, respectively, in the year-ago quarter. Improvement in the Retail segment was due to growth in the existing stores, and Specialty sales jumped on the back of a 29% increase in the grocery business and 23% in the foodservice and office business, offset partly by a 2% decline in the home delivery business.

Other Financial Update

Peet’s exited the quarter with cash, cash equivalents and investments of $42.9 million, after spending $14.2 million to buy back 367,000 shares. The company did not have any long-term debt at the end of the quarter.

At the end of the quarter, Peet’s had 193 stores compared to 192 stores at the end of the prior-year period.

In the quarter, the company incurred $1.0 million charge related to the Federal Trade Commission’s (FTC) anti-trust review of the acquisition of Diedrich Coffee by Green Mountain Coffee Roasters (GMCR). This charge will have a 5 cent impact on fiscal 2010 earnings per share.

Guidance

For fiscal 2010, Peet’s anticipates total net revenue to achieve the midpoint of 8%?12% guidance, excluding the impact of an extra week in fiscal 2009.

Peet’s forecasts pro forma earnings of $1.27–$1.30 for fiscal 2010. On a reported basis, the company anticipates earnings (including the FTC subpoena impact) of $1.22–$1.25 per share.

Peet’s Coffee & Tea shares maintain a Zacks #2 Rank, which translates into a short-term Buy recommendation. Our long-term recommendation for the stock remains Neutral.

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