Interview With Caribou Coffee CEO, Michael Tattersfield

Caribou Coffee (NASDAQ: CBOU) is a retail and commercial coffee vendor.  Its stock has soared more than 500% this year, well outperforming its peer group.  24/7 Wall St. had an opportunity to interview the company’s President and Chief Executive Officer, Michael Tattersfield, who recently took the helm at Caribou and brings with him extensive experience in the retail sector.  Tattersfield describes how the company has become profitable and how it plans to produce growth going forwards.

24/7 Wall St. : As you expand, when you are competing with companies like Starbucks and McDonald’s, do you think primarily in terms of product differentiation or getting good store locations?

Tattersfield: Even broader than that, it’s a combination of both.  As I look at brand differentiation I also look at customer experience.  Does it connect with what the Caribou brand really stands for and can we truly differentiate ourselves from a Starbucks and a McDonald’s?  Because we are truly all different and we have a different experience strategy.  We’re all going to be looking for the best real estate.  So that doesn’t take it out of the equation.  From a product strategy, we believe we have a superior product.  We’ll continue to apply that quality focus on everything else that we do.  So we’re in a test of looking at oven-baked items that we’re putting in stores now. We’ll be looking at seeing what the potential is to roll that out.   And it needs to match exactly what we’re doing with our coffee quality.  We do have differentiating strategies, but I also look at the brand experience.  Delivering that is one of the key components of us being successful.    

24/7 Wall St. :  Last quarter store sales were down slightly but commercial sales were up for you.  Is this something you envision continuing going forward, establishing more deals with supermarket chains and other commercial retailers?

Tattersfield:  One of the things that I came aboard — I have been here about 14 months — one of the things that the management team and I looked at evolving was the business from really a retail coffee house business to a branded coffee company.  And clearly a lot of our success that’s been happening this year is a big push to what we call our commercial business.  That entails the CPG category, the club category, which is Sam’s or Costco (NASDAQ: COST), as well as looking at other opportunities such as our relationship with Keurig and Green Mountain (NASDAQ: GMCR).  We’ve really grown this year in our commercial business from 2,000 doors to, at the end of the year, well over 6,000.  So if you look at the growth, from a revenue perspective even in the last quarter you saw basically our revenues were flat overall as a company.  We see a huge opportunity in the commercial businesses because you know 80% of the coffee is either consumed at or based out of home, not just in the retail coffee house base.  It doesn’t mean that we’re going to walk away from our retail coffee houses.  I love retail.  I’ve spent most of my career in retail and I think doing a fantastic job of differentiating the brand is probably going to happen most at the retail stores because then you can see how the brand translates to the consumer and what the brand stands for.  But we are also trying to figure out how to do that in the commercial business.  So to answer you question succinctly, we continue to see commercial growing and having a lot of opportunity.

24/7 Wall St. : Operating expenses on a quarter-to-quarter basis dropped from $25.8 million to $23.8 million, according to your most recent 10-Q.  To what extent do cost controls and store closings play a role in your plans going forward for expansion?

Tattersfield:  We are really not looking at continued store closures in our business.  One of the first things that we did as we came aboard was to rationalize the cost structure of our overall business.  So we did have a reduction in force and we did look at some closures of stores that clearly were not going to be able to perform because of poor real estate decisions.  We’re pretty much over that phase now.  Besides the normal “do you renew a lease?” as you look at if it’s in the best location versus moving it to a better location.  We don’t see significant reduction in our store-base anymore.  Opportunisticly, it might be something that we look at.  We are opening up 30 licenses this year.  So we continue to see that going forwards and are looking at doing that next year as well as pushing new prototype coffee houses because we also believe there’s a lot of space in how the category needs to evolve from where it traditionally is based today.

24/7 Wall St. :  This year coffee stocks in general have really been taking off.  Is this because margins in the coffee business have been improving dramatically or is it just that these stocks were just very oversold?

Tattersfield:  If you look at the category, I look at Caribou as a company that since its public offering has never been profitable in its history.  We have just delivered three consecutive quarters of profitable growth.  I think the Street gives you credit for that as long as you can continue to show the vision of where you want the brand to go and what direction you’re heading.  One of the things as we evolved this company from a retail coffee company to a branded coffee company is it’s a much larger category.  And if we continue to hold on to premium quality coffee products, that’s not something the consumer has been willing to give up.  The American consumer in particular, 54% of adults everyday get up and have coffee. It’s just one of those indulgent moments that’s part of the start of their day.  They might trade down on your menu or do something differently but most still are looking for a great quality product and experience. If that translates to people to buying more coffee stocks, there are plenty things that are going on with Green Mountain, which is another company that making tremendous inroads in the single cup serving option.  That’s a very viable business and we’re happy to be partnered with them in that growth.  But again in the multiple channel business that we’re looking, we see a tremendous opportunity in every one of our channels, including retail. So people are giving us credit for what we’ve done, I think it’s more important where we’re going.

24/7 Wall St. :  Alright Mike, that’s all I have for you.  I really appreciate you taking the time to speak with us today.

Tattersfield: No problem.  

Garrett W. McIntyre

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