Californian roaster, retailer and wholesaler of specialty grade coffee, Diedrich Coffee Inc, has reported results from operations for its Q3 ended 6 March 2002.

According to recently appointed CEO Phil Hirsch: "The company has reached the point where we can now begin to take advantage of opportunities to grow in each of our channels of distribution, both domestically and internationally.

"As we complete our recent restructuring initiatives, which include the sale of underperforming company-owned locations and the improvement of business fundamentals, we intend to begin investing strategically to maximize growth opportunities."

Profitability and operating EBITDA

The company reported a net loss of US$190,000 for the Q3 compared with a net loss of US$632,000 year on year. The loss per share was reduced to US$0.04 from US$0.20, an improvement resulting primarily from significant reductions in operating expenses and other expenses (depreciation and amortization, interest expense and losses on sale of assets).

Additionally, the company recorded a US$367,000 restructuring charge during the current Q3, less than a similar restructuring charge taken in the prior year. These improvements were partially offset by a Q3 charge of US$297,000 resulting from a malfunction in a manufacturing process referred to below. It should also be noted that the weighted average number of shares for the Q3 was 2 million higher than during the previous year period, which diluted the loss per share by approximately US$0.02. Operating EBITDA (earnings before interest, taxes, depreciation and amortization, and adding back any provisions for asset impairment or restructuring costs) declined 47.8% to US$812,000 for the quarter versus US$1.5m for the prior year period. Operating EBITDA declined due to the planned sale or closure of a number of retail units, including the sale of Coffee Plantation coffeehouses in Arizona, lower comparable store sales, and the manufacturing related charge noted above.

For the three quarters ended 6 March 2002, the company reported net income of US$599,000, compared with a net loss of US$1.6m for the same period a year ago. Year-to-date earnings per share increased to US$0.12 versus a loss of US$0.50 per share for the prior year period. Earnings per share was also diluted by about US$0.07 per share as a result of an additional 2 million shares outstanding for the three quarters compared with the same period a year ago. Operating EBITDA declined 8.8% to US$3.1m for the three quarters versus US$3.4m in 2001 for the reasons discussed above.

Revenue

Total revenue for the quarter ended 6 March 2002 was US$13.1m, a 17.5% decrease compared with revenue of US$15.8m for the prior year period. This decrease consists of a 23.2% decline in retail sales and a 9.5% decrease in wholesale and other revenue, partially offset by a 6.6% increase in franchise revenue.

Retail sales from company-owned retail units for the quarter declined by US$2.6m, or 23.2% compared with the prior year period. Planned closings or sales of underperforming company-owned locations caused the majority of this decrease. The balance of the reduction was due to a 1.9% decline in comparable company store sales, a smaller decline than experienced during the first two quarters of the fiscal year.

Wholesale revenue for the Q3 decreased US$0.3m or 9.5% year on year. This decrease is primarily attributable to lower roasted coffee sales to franchisees, which resulted from fewer domestic Gloria Jean's franchise units and lower comparable store sales. Franchise revenue for the Q3 increased to US$1.7m from US$1.6m due to new international franchise openings and domestic renewal fees.

For the three quarters ended 6 March 2002, total revenue was US$43.2m, a 17.1% decrease compared with revenue of US$52.1m for the prior year period. This decrease consists of a 19.4% decline in retail sales, a 16.8% decline in wholesale and other revenue, and a 2.6% decrease in franchise revenue compared with a year ago. Retail sales for the three quarters declined for primarily the reasons noted above regarding the quarterly decrease. Wholesale revenue for the three quarters declined from the prior year period due to the decision to discontinue the distribution of lower-margin non-coffee products to franchisees and to a decrease in coffee bean sales.

Franchise revenue for the three quarters declined compared with the prior year period as a result of fewer initial franchise fees recorded.

Comparable store sales

System-wide comparable store sales at Diedrich Coffee brand coffeehouses open at least one year declined 2.4% for the quarter, as compared with the prior year, while comparable store sales at the company's Coffee People coffeehouses declined 1.3% during this same period. For both brands, this is a smaller decline than was experienced in the first two quarters of the fiscal year. For the three quarters, system-wide comparable store sales at Diedrich Coffee brand coffeehouses open at least one year declined 3.7% versus prior year, and Coffee People coffeehouses declined 3.8% for the same period.

System-wide comparable store sales at Gloria Jean's units declined 2.3% during the Q3 compared with the same period last year. For the three quarters ended 6 March 2002, Gloria Jean's system-wide comparable store sales declined 4.6%.

Recent developments

Diedrich Coffee recently became aware of a potential product failure in its Keurig(TM) K-cup(TM) line related to a limited quantity of inventory shipped to distributors during the Q3.

K-cups are a patented single serve brewing technology that the company manufactures and sells to the office coffee service market under a licensing agreement with Keurig Inc. Diedrich Coffee immediately notified its Keurig distributors and offered to replace certain effected inventory previously shipped to them. This action resulted in a Q3 charge of US$297,000 related to the inventory subject to return. Accordingly, no Q3 revenue has been recorded for these shipments. The potential product failure resulted from a malfunction in the manufacturing process that is now fully resolved.