In Focus

Planning Peet's Coffee & Tea Party

You've probably planned a few parties. The organized chaos that precedes the big event usually leaves you questioning why you decided to throw the darn thing in the first place. Well, if you were about to get paid millions of dollars to do it, you might not think twice. Heck, I'd throw together an inaugural ball for just a smidgen of that amount! Actually, the party I'm talking about, took place last Thursday, January 25th. It was the IPO that kicked off the 2001 season. The guest of honor? Peet's Coffee & Tea, Inc.

Like all event organizers, they have been buried in preparations. They too have had to consider how many invitations to send out (i.e. number of shares to be sold), the price of a ticket (i.e. setting the initial stock price), and setting the date when most people can come (i.e. the actual IPO date). Fortunately, the underwriter, who is pretty much the party planner of the whole IPO shindig, can help them make these decisions.

Originally, 'ole PEET (its Nasdaq ticker symbol) planned to offer 3.3 million shares for a price of $10-$14 dollars per share. That range was then lowered to $8-$12. Hmmm. last minute markdowns. Doesn't seem like a good sign. To the dismay of the company and their underwriter, W.R. Hembrecht & Co., the stock was ultimately priced at $8 per share. Why? Well, with competitors such as Starbucks doing so well, they felt the need to give investors an added incentive to become buyers. Obviously $8 is a much more enticing price. On day number one, their stock closed up 17.2%! Sounds like they did the right thing, huh? Remember though, that percentage rise only translates into little more than a one dollar gain, nothing close to the tech IPO's of a couple of years ago when opening day often brought a 200% rise! Now, that would give you reason to party!

Once again, the main purpose of the IPO is to raise money. PEET also has the usual goals of how to spend it: debt reduction, marketing, expansion, and other general corporate purposes. If you've started to think like a Chick, you might be asking yourself why don't they just take out a loan and save themselves the headache? Well, two possible reasons. One, they may not qualify for the loan or perhaps not for the desired amount of money. This was definitely the reason for the recent IPO craze of dot-com companies.

Another added bonus of the IPO is that there's no interest to pay, as there would be on a loan. A company does have to "pay" in other ways, however, such as being accountable to shareholders. In fact, balloon-flying billionaire, Richard Branson of the Virgin Group (Virgin records, Virgin Atlantic airlines, etc.) only lasted one year as a public company. He felt so constrained by the bureaucracy that management ended up conducting a buyout to make Virgin private again. He detailed the saga in his aptly named autobiography, Losing My Virginity. (hehehe)

Since PEET has kept himself private all these years, we don't have a lot of numbers to look at (the perk of privacy), but that'll all change soon! What we do know is that this Berkeley, CA based company's primary business is the sale of fresh roasted whole bean coffee. According to their CEO, Chris Mottern, this is what sets them apart from their competition. In fact 60% of their revenue comes from coffee not sold in a cup! Whereas this Chick's favorite, Starbucks, has more than 3200 outlets (in just North America), PEET operates only 58 company-owned stores, in just 4 states, predominantly in Northern California.

Despite their niche-size retail business, they have established a presence across the U.S. They use several distribution outlets including specialty and gourmet food stores, online and mail order, catering to both office and restaurant accounts. Despite the competitive market, the company feels that if they stick to the same simple premise they've operated upon since 1966, purchasing only the highest quality beans, roasting them and shipping within 24 hours for freshness, they can percolate to the top. You can't blame them for being optimistic. Not only do they predate Starbucks, but they even claim they taught them how to roast (Peet's was Starbuck's supplier in the early 70's)! Time will tell.

Now, before you jump on this IPO party train, a final word of caution for us small investors. many experts say we should avoid IPOs altogether because institutional buyers generally have an edge in scooping them up at the most favorable prices. Personally, I'd sit out a few quarters, logging their numbers and when the dust settles, make a decision. I know, sometimes an IPO feels like a party that you simply must attend. Remember, us Chickies are long termers not day traders. A good, solid company worthy of your investment dollars will still be there. Sheez, doesn't that sound like your mother saying that cute boy you have a crush on will still ask you out, whether or not you go to the party? Well, we all know mother knows best!