Caribou Coffee Company, Inc. (CBOU)

HoldSideAnalyst (< 20) Submitted: 8/17/07 6:42 PM : Start Price: $6.54 CBOU Score: -35.86

There's a lot to dislike in this stock, but I'd like to make a few points and see your response. There are 3 fundamentals for me with this stock:
1. Like you mention, cash flow. If they stopped building stores today and capex dropped to a couple Mil a year, plus trim some OpEx, they could throw off close to $20 Mil per year. That means we've got a 6X cash flow company today with an option on a better company in the future.
2. Industry - The coffeehouse industry continues to grow well ahead of the broader economy, and SBUX today has roughly 9000 of the 35,000+ coffee shops in the US, with CBOU #2 with over 500. This represents a tremendous opportunity for someone to step up and be a real competitor to SBUX.
3. Expansion: A) They're beginning to franchise more stores. In the restaurant industry, franchised stores typically perform better than company owned stores, and because the parent company collects royalties, it's good from a margin point of view. B) A typical mature CBOU store does about $700,000 in annual sales, versus $1MM for SBUX. I'm not exactly sure what type of operating leverage they have internally, but I know it's decent - they just bought a roaster that is running well short of capacity. 2 years of 5-7% comps (much easier said than done) would get them to around 800,000 per store, assuming 500 mature stores and 12% EBITDA margins (reasonable compared to SBUX), they could trade for 9X EBITDA (belong historical range) and the company would be worth over $400MM. To be sure, it's a bull scenario, and the toughest part is clearly achieving those comps. With that, everything else would fall into place.
From today's price, a number of neutral scenarios could bring the stock price to around 8. 18MM EBITDA at 9X by YE08 implies a $8.40 stock price - 25% upside.

Problems:
I have the same questions about the management team. Why aren't they getting it done? It's hardly a complicated business. Meanwhile, they're launching 10 new CBOU branded products a quarter, into a division which will have to grow 50% PA for the next 4 years to dent the bottom line.
Sentiment: The company is 60% owned by Arcapita Bank, based in Bahrain. In 2002, a nasty rumor was floated that this bank, and by extension, CBOU, were funneling money to terrorists. This was proven patently false, but unfortunately it left an impression in the minds of many consumers. Also because of this ownership the company must operate under Islamic law. While this is relatively meaningless from a business point of view (basically means no pork or alochol in the stores), it may also leave a mark in some consumers minds, and you can't deny latent Islamophobia in this country.

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