How Can You Stay Awake During Black Friday?

Black Friday is coming up, which means that millions of Americans will be lining up in front of stores to purchase discounted goods. Many of these people will be standing in the bitter cold weather for hours at a time, some waiting 12-16 hours just to save a few hundred dollars on their purchases. Apart from wearing multiple layers of clothing many of these consumers will be looking to coffee to stay awake while standing and waiting.

One popular coffee store is Caribou Coffee CBOU. Caribou operates in 20 states, owning over 500 coffee houses. It franchises its brands on top of retail locations along with selling its products in department stores. Would investors prefer to purchase Caribou Coffee over its competitors, like Starbucks SBUX and Dunkin Donuts DNKN? How does Caribou Coffee differentiate itself from these other brands?

Although the product offerings between the companies are quite similar, customer testimonials can clear up the confusion between the competitors. For example, some people believe that Starbucks' brand has become commoditized, preventing the "personal" touch that many customers like. Basically, when they order a frappuccino from a Starbucks store, many people believe they will receive processed ingredients that were simply unfrozen and reheated. With Caribou Coffee, many customers believe that there is a more personal touch, where the ingredients are more fresh and better prepared. While the average consumer has no idea if this is actually true, the perception exists.

Starbucks and Caribou Coffee both offer food items, but the same principle applies. Although it appears that many customers feel the quality is slightly higher at Caribou Coffee, it simply has not experienced as much success as Starbucks. One of the primary reasons may be that Starbucks opened its first store in 1971, while Caribou only debuted in 1992. Apart from the 20 year head start, Starbucks marketing campaign has been much more aggressive than Caribou Coffee's efforts. Starbucks has relentlessly put its image on TV and various internet outlets. Caribou has done the same, but it has limited itself, which may simply be a function of resource allocation.

Do investors have reasons to purchase Caribou Coffee though? The first thing that investors may notice is that Caribou Coffee is wildly undervalued compared to Starbucks. For example, Caribou is trading at 8.3 times earnings, while Starbucks is trading at 28.3 times earnings. The same trend is seen with price/book value and price/sales. In terms of other value metrics, Caribou and Starbucks have similar operating and net margins, but Caribou's return on equity is much higher, at 45.4%, compared to Starbucks, at 29.7%.

Another helpful thing to consider is Caribou's historical performance. First of all, its revenue has been increasing year over year with impressive consistency. Starbucks, on the other hand, has experienced fairly volatile revenues over the last five years. Moreover, Caribou has achieved profitability in the last couple years, by decreasing expenses in the face of rising revenues. As can be expected, cash has been positive in the last several years, even when net income was negative. Working capital fluctuations has allowed caribou to continuously stay positive in its cash flow from operations.

Capital expenditures have been fairly static, which may or may not mean that Caribou Coffee's growth will be stagnant going into the future. Interestingly it does not appear as if the company is hedging itself against market fluctuations. Grain futures and other soft commodities have been fairly violent during 2011, and it may have been beneficial for Caribou to hedge itself using coffee bean futures, or even grain futures for that matter. On a more positive note, Caribou has not issued much debt in the last five years; in fact, when it issued debt in 2008, it managed to pay it off that year itself. Especially in a tough economic environment, this feat is impressive in and of itself. It has not issued very much equity as well, which means that it is growing without diluting shareholders' ownership of the profits.

As may be expected, the company's asset base has increased significantly over the years. One thing to note is that inventories have increased significantly. This can be construed in one of two ways. The company is either expanding significantly, thus requiring more inventory, or, it is having trouble turning over its inventory, which is a bad sign, signifying stagnant growth and sales. It is up to investors to figure out what the deal is, although it may be a clearer picture when looking at property, plant, and equipment, which has grown at a slower rate than inventories in the past several years. Fortunately for Caribou Coffee, short-term liabilities and debts have been decreasing year over year, providing investors with some semblance of sustenance. Long-term debt and liabilities have also been decreasing year over year. It is also beneficial for investors to consider that total assets amount to $102 million while total liabilities come out to $39 million. This means that approximately $62 million is left for shareholders' equity. Based on other operational trends, retained earnings and paid-in capital have been increasing year over year, directly adding value to shareholders.

Does the information mean that Caribou Coffee will continue going strong into the future? No one can ever tell, but it does appear that Caribou's appeal has been growing over the last several years. It has even weathered the 2008 crisis, which notoriously killed consumer discretionary spending. While caffeine is an extremely addictive substance, it is interesting that many consumers decided to continue to go to stores like Caribou Coffee and Starbucks instead of brewing coffee in their homes for much cheaper. This apparent power that coffee stores have over its customers may be something worthwhile to investors looking to expand their consumer discretionary holdings or gaining exposure to the food and beverage industry.

Investors should learn more about Caribou Coffee's exposure. Many of its competitors operate in most American states, some having international exposure. Caribou Coffee's lack of penetration in the American and international markets may hinder future growth. On the other hand, it may be better off than its competitors if the Eurozone fails. Nonetheless, understanding management's plans for growth would be interesting, whether management wants to ramp up capital expenditures or pursue strategic transactions. Caribou Coffee could be an undervalued stock that could weather future economic crises, regardless of what happens to the global economy. Investors should also try to find if there are any factors that significantly differentiate Caribou from other coffee shops.

Caribou Coffee is currently trading at $13.25, up almost 32% for the year.

• The company's environment appears to be received better by consumers. Consumers tend to think smaller coffee shops like Caribou offer fresher, less commoditized products.

• Caribou Coffee's growth has been fairly stable over the last several years, making clear trends in revenues, expenses, and cash flow.

• The firm has managed to retain its client base in past economic crises, which may mean it could whether the impending Eurozone volatility.

• Starbucks and other companies have much higher exposure to the US and international locations as well.

• Some consumers prefer larger brand names, simply because of the implicit trust that they have built over time.

• Caribou Coffee only because profitable two years ago, so any large fluctuations in revenues or expenses could cause it to fall back to net losses. This would result in lower EPS, and could drive down the stock if it misses Wall Street estimates.