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Caribou stock: Half full or half empty?

By MATT McKINNEY, Star Tribune

Last update: March 9, 2008 - 11:26 AM

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WHAT IS IT REALLY WORTH?

CARIBOU STOCK PRICE

$2.61

BOOK VALUE

$3.06

CASH PER SHARE

51¢

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It was an enterprising move in the early 1990s when two Minnesotans saw the future of coffeehouses (read: Starbucks) and made a decision: Before the burgeoning coffee chain hit Minnesota, they scrambled to put together their own. To this day, Caribou Coffee remains a largely Minnesota phenomenon, outmuscling Starbucks in its home state but losing the battle, badly, elsewhere.

But is the company doing as poorly as its stock price suggests?

The stock, which closed at $2.61 Friday, has fallen so far from the $14 a share at which the company went public in September of 2005, that it now trades below book value, a rare event for any stock. What's more, Caribou still has 51 cents of cash per share, putting a buyer in the position of ponying up just over $2 for the stock once that cash is subtracted and owning equity with a book value of $3.06 per share.

So is this a classic deep-value play, or yet another value trap in a free-falling market?

The company hasn't helped clear the picture in recent months, reluctant to provide guidance and saying only that a long-term plan is in the works. Two top executives also resigned during that period, CEO Michael Coles and Chief Financial Officer George Mileusnic.

"The valuation in general reflects a lot of uncertainty around the company's business model and long-term prospects," said David E. Tarantino, an analyst with Robert W. Baird & Co. Inc., an international firm based in Milwaukee.

Recent licensing and franchising deals, along with increased sales through commercial customers, are encouraging, he said, but the company needs to pick a leader and move ahead.

"I think they've laid out some of those plans, but there's still a lot of pieces to that puzzle that need to come together," he said.

Investors may want to not count on the cash on hand in making any investment: Caribou hasn't turned a profit since 2002. Instead, losses have been the rule.

While sales grew $3.5 million to $70.2 million in the fourth quarter, a 5.2 percent increase over the previous year's fourth quarter, the growth didn't come from the company-owned coffeehouses. Instead, other revenue, including franchise fees, royalties and sales to commercial customers and franchisees grew 84.4 percent compared with the year earlier period. And that growth -- while impressive on a percentage basis -- accounted for a small part of the company's overall revenue, about $5.5 million of the total sales for the quarter.

The hope for Caribou now might rest on a reversal of sorts of its previous policy of quickly growing its store count.

The company closed 28 stores last year and plans a similar number of closures this year, trimming the weaker stores from the operation and quitting some markets entirely. Nebraska saw all four of its stores close, for example.

"We're going to have a healthier store base," said investor relations spokeswoman Kathleen Heaney. "We want to focus on the states we're already in."

That would be Minnesota, which has some 200 locations, followed by clusters of stores in Illinois and Michigan and a smaller number in several other states.

The smaller-is-better philosophy is expected to eventually trim the company's losses, which for the year ending in December are estimated at 71 cents per share but are expected to be 37 cents per share for 2009.

Analysts believe the company's shares could hit $3 if the company stems the bleeding as expected, which from current levels would represent a nearly 15 percent return.

"Being a much smaller competitor where there's a giant does not necessarily mean you are doomed to failure at all," said Alfred Marcus, professor of strategic management at the Carlson School of Management at the University of Minnesota. "If you can dominate a regional market, that's a very powerful position to be in."

That said, Caribou has worked too hard to be like Starbucks when they should be differentiating themselves, said Marcus.

"They have to have a point of differentiation that's very clear in someone's mind," he said.

Matt McKinney • 612-673-7329

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