CBOU Caribou Coffee Company, Inc. (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 4, 2010.

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to           .

Commission File Number: 000-51535

 

CARIBOU COFFEE COMPANY, INC.

(Exact Name of Registrant as Specified in Its Charter)

Minnesota (State or other jurisdiction of incorporation or organization)		41-1731219 (I.R.S. Employer Identification No.)

3900 Lakebreeze Avenue North Brooklyn Center, Minnesota (Address of principal executive offices)		55429 (Zip Code)

Registrant’s Telephone Number, Including Area Code : (763) 592-2200

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the proceeding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer o		Non-Accelerated Filer o (Do not check if a smaller reporting company)		Smaller Reporting Company þ

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

     On August 5, 2010, 20,039,269 shares of Registrant’s $0.01 par value common stock were outstanding.

 

 

CARIBOU COFFEE COMPANY, INC.

FORM 10-Q

For the Thirteen Week Period Ended July 4, 2010

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements		2
Condensed Consolidated Statements of Operations		2
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statement of Changes in Equity		4
Condensed Consolidated Statements of Cash Flows		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3. Quantitative and Qualitative Disclosures About Market Risk		27
Item 4T. Controls and Procedures		27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings		28
Item 1A. Risk Factors		28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		28
Item 3. Defaults Upon Senior Securities		28
Item 4. Reserved		28
Item 5. Other Information		28
Item 6. Exhibits		29
Signature		30
EX-31.1
EX-31.2
EX-32.1
EX-32.2

See accompanying notes.

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 4,				June 28,				July 4,				June 28,
		2010				2009				2010				2009
		(In thousands, except for per share amounts)
						(Unaudited)
Coffeehouse sales		$	57,751			$	55,294			$	113,348			$	108,158
Commercial and franchise sales			11,133				7,660				22,587				15,176
Total net sales			68,884				62,954				135,935				123,334
Cost of sales and related occupancy costs			30,551				27,317				61,950				53,589
Operating expenses			25,067				23,873				50,029				47,275
Depreciation and amortization			3,028				3,570				6,172				7,311
General and administrative expenses			7,633				6,789				14,142				13,378
Operating income			2,606				1,405				3,642				1,781
Other income (expense):
Interest income			5				7				10				7
Interest expense			(64	)			(63	)			(171	)			(121	)
Income before provision for (benefit from) income taxes			2,547				1,349				3,481				1,667
Provision for (benefit from) income taxes			20				59				(138	)			(42	)
Net income			2,527				1,290				3,619				1,709
Less: Net income attributable to noncontrolling interest			106				122				160				195
Net Income attributable to Caribou Coffee Company, Inc.		$	2,421			$	1,168			$	3,459			$	1,514
Basic net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.12			$	0.06			$	0.18			$	0.08
Diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.12			$	0.06			$	0.17			$	0.08
Basic weighted average number of shares outstanding			19,515				19,371				19,514				19,371
Diluted weighted average number of shares outstanding			20,520				20,118				20,381				19,865

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

CONDENSED CONSOLIDATED BALANCE SHEETS

		July 4,				January 3,
		2010				2010
		In thousands, except per share amounts
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	16,188			$	23,578
Accounts receivable (net of allowance for doubtful accounts of $21 and $3 at July 4, 2010 and January 3, 2010, respectively)			5,536				5,887
Other receivables (net of allowance for doubtful accounts of $191 and $128 at July 4, 2010 and January 3, 2010, respectively)			1,132				1,268
Income tax receivable			164				193
Inventories			24,776				13,278
Prepaid expenses and other current assets			1,016				1,546
Total current assets			48,812				45,750
Property and equipment, net of accumulated depreciation and amortization			41,349				47,135
Restricted cash			605				605
Other assets			627				237
Total assets		$	91,393			$	93,727
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	9,381			$	9,042
Accrued compensation			4,566				6,296
Accrued expenses			6,379				7,563
Deferred revenue			6,112				8,747
Total current liabilities			26,438				31,648
Asset retirement liability			1,157				1,120
Deferred rent liability			6,725				7,955
Deferred revenue			2,072				2,072
Income tax liability			10				156
Total long term liabilities			9,964				11,303
Equity:
Caribou Coffee Company, Inc. Shareholders’ equity:
Preferred stock, par value $.01, 20,000 shares authorized; no shares issued and outstanding			—				—
Common stock, par value $.01, 200,000 shares authorized; 20,039 and 19,814 shares issued and outstanding at July 4, 2010 and January 3, 2010, respectively			200				198
Additional paid-in capital			127,518				126,770
Accumulated comprehensive loss			(12	)			(7	)
Accumulated deficit			(72,882	)			(76,341	)
Total Caribou Coffee Company, Inc. shareholders’ equity			54,824				50,620
Noncontrolling interest			166				156
Total equity			54,990				50,776
Total liabilities and equity		$	91,393			$	93,727

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(unaudited)
(in thousands)

		Common Stock								Additional								Accumulated
		Number of								Paid-In				Noncontrolling				Other				Accumulated
		Shares				Amount				Capital				Interest				Comprehensive Loss				Deficit				Equity
Balance, January 3, 2010			19,814			$	198			$	126,770			$	156			$	(7	)		$	(76,341	)		$	50,776
Net income			—				—				—				160				—				3,459				3,619
Changes in fair value of derivative financial instruments			—				—				—				—				(5	)			—				(5	)
Comprehensive income																										$	3,614
Share based compensation			—				—				618				—				—				—				618
Options exercised			30				—				205				—				—				—				205
Restricted shares issued, net of cancellations			205				2				(2	)			—				—				—				—
Distribution of noncontrolling interest			—				—				—				(150	)			—				—				(150	)
Stock repurchase			(10	)			—				(73	)			—				—				—				(73	)
Balance, July 4, 2010			20,039			$	200			$	127,518			$	166			$	(12	)		$	(72,882	)		$	54,990

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES
(A Majority Owned Subsidiary of Caribou Holding Company Limited)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Twenty-Six Weeks Ended
		July 4,				June 28,
		2010				2009
		(In thousands)
		(Unaudited)
Operating activities
Net income attributable to Caribou Coffee Company, Inc.		$	3,459			$	1,514
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and amortization			7,140				8,396
Amortization of deferred financing fees			97				78
Noncontrolling interest			160				195
Stock-based compensation			618				456
Other			(132	)			52
Changes in operating assets and liabilities:
Accounts receivable and other receivables			516				1,228
Inventories			(11,498	)			(440	)
Prepaid expenses and other assets			342				166
Accounts payable			339				1,013
Accrued expenses and other liabilities			(3,923	)			(1,752	)
Deferred revenue			(2,635	)			(3,377	)
Net cash (used) provided by operating activities			(5,517	)			7,529
Investing activities
Payments for property and equipment			(1,562	)			(453	)
Proceeds from the disposal of property			6				24
Net cash used in investing activities			(1,556	)			(429	)
Financing activities
Distribution of noncontrolling interest			(150	)			(73	)
Purchase of noncontrolling interest			—				(105	)
Issuance of common stock			205				—
Payment of debt financing fees			(299	)			(31	)
Stock repurchase			(73	)			—
Net cash used by financing activities			(317	)			(209	)
(Decrease) increase in cash and cash equivalents			(7,390	)			6,891
Cash and cash equivalents at beginning of period			23,578				11,060
Cash and cash equivalents at end of period		$	16,188			$	17,951
Supplemental disclosure of cash flow information
Noncash financing and investing transactions:
Accrual for leasehold improvements, furniture and equipment		$	—			$	—

See accompanying notes.

CARIBOU COFFEE COMPANY, INC. AND AFFILIATES

(A Majority Owned Subsidiary of Caribou Holding Company Limited)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

     The “Company” and “Caribou” refer to Caribou Coffee Company, Inc. and its affiliates, collectively.

     The unaudited condensed consolidated financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, these statements include all adjustments considered necessary for the fair presentation of all interim periods reported herein. All adjustments are of a normal recurring nature unless otherwise disclosed. Management believes that the disclosures made are adequate for a fair presentation of the Company’s results of operations, financial position and cash flows. These condensed consolidated financial statements should be read in conjunction with the year-end consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K (File No. 000-51535).

      Principles of Consolidation

     The Company’s condensed consolidated financial statements include the accounts of Caribou Coffee Company, Inc., affiliates that it controls and a third party finance company (which exists for purposes of the Company’s revolving credit facility, as described in the Company’s Annual Report on Form 10-K) where the Company is the primary beneficiary in a variable interest entity. The affiliates are Caribou MSP Airport, a partnership in which the Company owns a 49% interest and that operates six coffeehouses, and Caribou Coffee Development Company, Inc., a licensor of Caribou Coffee branded coffeehouses. The Company controls the daily operations of Caribou Coffee Development Company, Inc. and accordingly consolidates their results of operations. The Company provided a loan to its partner in Caribou MSP Airport for all of the partner’s equity contribution to the venture. Consequently, the Company bears all the risk of loss but does not control all decisions that may have a significant effect on the success of the venture. Therefore, the Company consolidates the Caribou MSP Airport, as it is the primary beneficiary in this variable interest entity. All material intercompany balances and transactions between Caribou Coffee Company, Inc., Caribou MSP Airport and Caribou Coffee Development Company, Inc. and the third party finance company have been eliminated in consolidation.

      Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the accompanying consolidated financial statements. Actual results may differ from those estimates, and such differences may be material to the consolidated financial statements.

      Fiscal Year End

     The Company’s fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Fiscal year 2009 included 53 weeks. Each fiscal quarter reported herein consists of two four-week months and one five-week month.

     The Company’s sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended July 4, 2010 are not necessarily indicative of future results that may be expected for the year ending January 2, 2011.

2. Summary of Significant Accounting Policies

      Revenue Recognition

     The Company recognizes retail coffeehouse sales for products and services when payment is tendered at the point of sale. Sales tax collected from customers is presented net of amounts expected to be remitted to various tax jurisdictions. Accordingly, sales taxes have no effect on the Company’s reported net sales in the accompanying statements of operations.

     Revenue from the sale of products to commercial, franchise or on-line customers is recognized when ownership and price risk of the products are legally transferred to the customer, which is generally upon the shipment of goods. Revenues include any applicable shipping and handling costs invoiced to the customer, and the expense of such shipping and handling costs is included in cost of sales.

     The Company sells stored value cards of various denominations. Cash receipts related to stored value card sales are deferred when initially received and revenue is recognized when the card is redeemed and the related products are delivered to the customer. Such amounts are classified as a current liability on the Company’s condensed consolidated balance sheets. The Company will honor all stored value cards presented for payment; however, the Company has determined that the likelihood of redemption is remote for certain card balances due to long periods of inactivity. In these circumstances, to the extent management determines there is no requirement for remitting balances to government agencies under unclaimed property laws, card and certificate balances may be recognized in the consolidated statements of operations. The Company uses the redemption recognition method and recognizes the estimated value of abandoned cards as a percentage of every stored value card redeemed and includes the amount in coffeehouse sales. Such amounts represent the Company’s experience regarding unused balances related to stored value cards redeemed. The Company excludes stored value card balances sold in jurisdictions which require remittance of unused balances to government agencies under unclaimed property laws.

     Territory development fees and initial franchise fees are recognized upon substantial performance of services for a new territory or coffeehouse, which is generally upon the opening of a new coffeehouse. Royalties based upon a percentage of reported sales are recognized on a monthly basis when earned. Cash payments received in advance for territory development fees or initial franchise fees are recorded as deferred revenue until earned.

     All revenues are recognized net of any discounts, returns, allowances and sales incentives, including coupon redemptions and rebates. The Company periodically participates in trade-promotion programs such as shelf price reductions and consumer coupon programs that require the Company to estimate and accrue the expected cost of such programs. Coupons are recognized as a liability when distributed based upon expected consumer redemptions. The Company maintains liabilities based on historical experience and management’s judgment at the end of each period for the estimated expenses incurred, but unpaid for these programs

      Operating Leases and Rent Expense

     Certain of the Company’s lease agreements provide for scheduled rent increases during the lease term or for rental payments commencing at a date other than the date of initial occupancy. Rent expense is recorded on a straight-line basis over the initial lease term and renewal periods that are reasonably assured. The difference between rent expense and rent paid is recorded as deferred rent and is included in “accrued expenses” and “deferred rent liability” in the consolidated balance sheets. Contingent rents, including those based on a percentage of retail sales over stated levels, and rental payment increases based on a contingent future event are accrued over the respective contingency periods when the achievement of such targets or events are deemed to be probable by the Company.

3. Recent Accounting Pronouncements

     In June 2009, the FASB issued guidance which amends certain ASC concepts related to consolidation of variable interest entities. Among other accounting and disclosure requirements, this guidance replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses of the entity or the right to receive benefits from the entity.

The Company adopted this guidance on January 4, 2010. The adoption of this guidance did not have a material impact on its financial statements.

4. Derivative Financial Instruments

     The Company evaluates various strategies in managing its exposure to market-based risks, such as entering into hedging transactions to manage its exposure to fluctuating dairy commodity prices.

     The Company records all derivatives on the condensed consolidated balance sheets at fair value. For those cash flow hedges that have been designated and qualify as an effective accounting hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (“OCI”) and subsequently reclassified into net earnings when the hedged exposure affects net income. For those cash flow hedges that are not designated or do not qualify as an effective accounting hedge, the entire derivative gain or loss is recorded in earnings as incurred.

     As of both July 4, 2010 and January 3, 2010, the Company had accumulated net derivative losses of less than $0.1 million in OCI and in accrued expenses, all of which pertains to derivatives designated as cash flow hedging instruments that will be realized within 12 months and will also continue to experience fair value changes before affecting earnings. Based on notional amounts, as of July 4, 2010 the Company had dairy commodity futures contracts representing approximately four hundred thousand gallons. The Company’s cash flow derivative instruments contain credit-risk-related contingent features. At July 4, 2010, the Company has no collateral posted related to these contingent features.

     For those derivatives designated as cash flow hedging instruments, a loss of less than $0.1 million was recognized in earnings for both the thirteen and twenty-six week periods ended July 4, 2010. There were no derivatives designated as hedging instruments during the thirteen and twenty-six week periods ended June 28, 2009.

     During the thirteen and twenty-six week periods ended July 4, 2010, the Company did not have any commodity hedges not designated as hedging instruments. During the thirteen and twenty-six week periods ended June 28, 2009, the Company recognized $0.1 million in losses and $0.1 in gains, respectively, related to commodity hedges not designated as hedging instruments.

     The recognized gains/losses related to commodity hedges not designated as hedging instruments and commodity hedges designated as hedging instruments are recorded in the condensed consolidated statements of operations as costs of goods sold and related occupancy expenses.

5. Fair Value Measurements

     Generally Accepted Accounting Principles define fair value, establish a framework for measuring fair value, and establish a fair value hierarchy that prioritizes the inputs used to measure fair value:

	•		Level 1: Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
	•		Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
	•		Level 3: Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

     The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of July 4, 2010 (in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents		$	16,188			$	16,188			$	—			$	—
Liabilities:
Derivatives		$	12			$	12			$	—			$	—

     The following table presents the financial assets and liabilities measured at fair value on a recurring basis as of January 3, 2010 (in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents		$	23,578			$	23,578			$	—			$	—
Liabilities:
Derivatives		$	7			$	7			$	—			$	—

     Cash and cash equivalents include cash held at FDIC-insured financial institutions and highly liquid money market funds. The fair value of cash equivalents is determined using quoted market prices in active markets for identical assets, thus they are considered to be Level 1 instruments.

     Derivative assets consist of commodity futures contracts. Where applicable, the Company uses quoted prices in an active market for identical derivative assets and liabilities that are traded in exchanges. These derivative assets are included in Level 1.

6. Inventories

Inventories consist of the following (in thousands):

		July 4,				January 3,
		2010				2010
Coffee		$	18,220			$	5,615
Other merchandise held for sale			3,801				4,029
Supplies			2,755				3,634
		$	24,776			$	13,278

     At July 4, 2010 and January 3, 2010, the Company had committed to fixed price purchase commitments, primarily for green coffee, aggregating approximately $21.3 million and $15.1 million, respectively. These fixed price contracts are for less than one year.

7. Equity and Stock Based Compensation

     The Company maintains stock compensation plans, which provide for the granting of non-qualified stock options and restricted stock to officers and key employees and certain non-employees. Stock options have been granted at prices equal to the fair market values as of the dates of grant. Options and restricted stock generally vest over four years and options generally expire ten years from the grant date. Stock-based compensation expense for the thirteen weeks ended July 4, 2010 and June 28, 2009 was approximately $0.4 million and $0.2 million, respectively, and is included in general and administrative expenses in the condensed consolidated statements of operations. Stock-based compensation for the twenty-six weeks ended July 4, 2010 and June 28, 2009 was approximately $0.6 million and $0.5 million respectively.

Stock option activity during the period indicated is as follows (in thousands, except per share and life data):

						Weighted				Weighted
		Number of				Average				Average
		Shares				Exercise Price				Contract Life
Outstanding, January 3, 2010			1,696			$	4.27			7.54 Yrs
Granted			—			$	—
Exercised			(5	)		$	5.72
Forfeited			(26	)		$	6.09
Outstanding, April 4, 2010			1,665			$	4.23			7.31 Yrs
Granted			—			$	—
Exercised			(25	)		$	7.05
Forfeited			(10	)		$	6.32
Outstanding, July 4, 2010			1,630			$	4.18			7.10 Yrs
Options vested at July 4, 2010			787			$	5.98			6.05 Yrs

     Restricted Stock activity during the period indicated is as follows (in thousands, except per share and life data):

						Weighted				Weighted
		Number of				Average Grant Date				Average
		Shares				Fair Value				Contract Life
Outstanding, January 3, 2010			300			$	5.83
Granted			215			$	7.07
Forfeited			(9	)		$	8.15
Outstanding, April 4, 2010			506			$	6.31			3.31 Yrs
Granted			—			$
Vested			(3	)		$	1.86
Forfeited			—			$
Outstanding, July 4, 2010			503			$	6.34			3.11 Yrs

8. Income Taxes

     During the thirteen and twenty-six weeks ended July 4, 2010, the Company recognized a tax provision of less than $0.1 million and tax benefit of $0.1 million, respectively. After consideration of all evidence, both positive and negative, management has recorded a valuation allowance against its deferred income tax assets at July 4, 2010 due to the uncertainty of realizing such deferred income tax assets. During the thirteen and twenty-six weeks ended June 28, 2009, the Company recognized a tax provision of less than $0.1 million and tax benefit of less than $0.1 million, respectively.

9. Net Income Per Share

     Basic and diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share for the thirteen week and twenty-six periods ended July 4, 2010 and June 28, 2009, were as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Twenty-Six Weeks Ended
		July 4,				June 28,				July 4				June 28,
		2010				2009				2010				2009
Net income attributable to Caribou Coffee Company, Inc.		$	2,421			$	1,168			$	3,459			$	1,514
Weighted average common shares outstanding - basic			19,515				19,371				19,514				19,371
Dilutive impact of stock-based compensation			1,005				747				867				494
Weighted average common shares outstanding - dilutive			20,520				20,118				20,381				19,865
Basic net income per share		$	0.12			$	0.06			$	0.18			$	0.08
Diluted net income per share		$	0.12			$	0.06			$	0.17			$	0.08

     For the thirteen week periods ended July 4, 2010 and June 28, 2009, 0.2 million and 0.7 million stock options, respectively, and for the twenty-six week periods ended July 4, 2010 and June 28, 2009, 0.4 million and 1.0 million stock options, respectively were excluded from the calculation of shares applicable to diluted net income (loss) per share because their inclusion would have been anti-dilutive.

10. Master Franchise Agreement

     In November 2004, the Company entered into a Master Franchise Agreement with a franchisee. The agreement provides the franchisee the right to develop, subfranchise or operate 250 Caribou Coffee coffeehouses in 12 Middle Eastern countries. The Agreement expires in November 2012 and provides for certain renewal options.

     In connection with the agreement, the franchisee paid the Company a nonrefundable deposit aggregating $3.3 million. In addition to the deposit, the franchisee is obligated to pay the Company $20 thousand per franchised/subfranchised coffeehouse (initial franchise fee) opened for the first 100 Caribou Coffee Coffeehouses and $15 thousand for each additional franchised/subfranchised coffeehouse opened (after the first 100). The agreement provides for $5 thousand of the initial deposit received by the Company to be applied against the initial franchise fee as discussed herein. Monthly royalty payments ranging from 3%-5% of gross sales are also due to the Company.

     As of July 4, 2010 and January 3, 2010, the Company included $2.1 million and $2.0 million, respectively, of the deposit in long term liabilities as deferred revenue and $0.5 million and $0.5 million, respectively, in current liabilities as deferred revenue on its balance sheet. The initial deposit will be amortized into income on a pro rata basis along with the initial franchise fee payments received in connection with the execution of the franchise or subfranchise agreements at the time of the coffeehouse opening. The current portion of deferred revenue represents the franchise fees for the coffeehouses estimated to be opened during the subsequent twelve months per the development schedule in the Master Franchise Agreement. At July 4, 2010, there were 70 coffeehouses operating under this Agreement. The franchisee and certain owners of the franchisee also own indirect interests in Caribou Holding Company Limited.

11. Revolving Credit Facility

     On February 19, 2010, the Company entered into a sale leaseback arrangement with a third party finance company whereby from time to time the Company sells equipment to the finance company, and, immediately following the sale, it leases back all of the equipment it sold to such third party. The Company does not recognize any gain or loss on the sale of the assets. The maximum amount of equipment the Company can sell and leaseback is $15.0 million, with an option for an additional $10.0 million. The agreement expires on February 19, 2013. Annual rent payable under the lease arrangement is equal to the amount outstanding under the lease financing arrangement

multiplied by the applicable Federal Funds effective rate plus a specified margin or the lenders prime rate plus a specified margin.

     The finance company funds its obligations under the lease financing arrangement through a revolving credit facility that it entered into with a commercial lender also on February 19, 2010. The terms of the revolving credit facility are economically equivalent to the lease financing arrangement such that the amount of rent payments and unpaid acquisition costs under the lease financing arrangement are at all times equal to the interest and principal under the revolving credit facility. The Company consolidates the third party finance company as the Company is the primary beneficiary in a variable interest entity due to the terms and provisions of the lease financing arrangement. Accordingly, the Company’s condensed consolidated balance sheets include all assets and liabilities of the third party finance company under the captions property and equipment and revolving credit facility, respectively. The Company’s condensed consolidated statements of operations include all the operations of the finance company including all interest expense related to the revolving credit facility. Notwithstanding this presentation, the Company’s obligations are limited to its obligations under the lease financing arrangement and the Company has no obligations under the revolving credit facility. The third party finance company was established solely for the purpose of facilitating the Company’s sale leaseback arrangement. The finance company does not have any other assets or liabilities or income and expense other than those associated with the revolving credit facility. At July 4, 2010 there was no property and equipment leased under this arrangement. The lease financing arrangement has been structured to be consistent with Shari’ah principles.

     Both the lease financing arrangement and the revolving credit facility above were entered into on February 19, 2010. Simultaneously, the Company terminated a similar lease financing arrangement and revolving credit facility with a different commercial lender. Upon termination of old lease financing arrangement and revolving credit facility, the Company wrote off $0.1 million in deferred financing fees and capitalized $0.3 million in deferred financing fees related to the new lease arrangement and revolving credit facility, which will be amortized over the three year life of the agreements.

     The terms of the sale leaseback agreement contain certain financial covenants and limitations on the amount used for expansion activities based on leverage ratios and interest coverage ratios of the Company. The Company is liable for 0.5% commitment fee on any unused portion of the facility. There are no amounts outstanding under the new facility at July 4, 2010 or under the previous facility at January 3, 2010.

     Unamortized deferred financing fees capitalized on the balance sheet totaled $0.3 million and $0.1 million as of July 4, 2010 and January 3, 2010 respectively. Interest payable under the new revolving credit facility is equal to the amount outstanding under the facility multiplied by the applicable LIBOR rate plus a specified margin.

12. Commitments and Contingencies

     On July 26, 2005, three of the Company’s former employees filed a lawsuit against us in the State of Minnesota District Court for Hennepin County seeking monetary and equitable relief from us under the Minnesota Fair Labor Standards Act, or the Minnesota FLSA, the federal FLSA and state common law. The suit primarily alleged that the Company misclassified its retail coffeehouse managers as exempt from the overtime provisions of the Minnesota FLSA and the federal FLSA and that these managers are therefore entitled to overtime compensation for each week in which they worked more than 40 hours from May 2002 to the present with respect to the claims under the federal FLSA and for weeks in which they worked more than 48 hours from May 2003 to the present with respect to the claims under the Minnesota FLSA. Plaintiffs sought payment of allegedly owed and unpaid overtime compensation, liquidated damages, interest and among other things, attorney’s fees and costs.

     On February 1, 2008, the Company entered into a Stipulation of Settlement (the “Stipulation”) to settle the lawsuit. The Stipulation provides for a gross settlement payment of $2.7 million, plus the employer’s share of payroll taxes. A partial settlement payment of $1.8 million was made in the first quarter of 2008 and the final settlement payment of $1.0 million was made in the first quarter of 2009.

     In addition, from time to time, the Company becomes involved in certain legal proceedings in the ordinary course of business. The Company does not believe that any such ordinary course legal proceedings to which it is currently a party will have a material adverse effect on its financial position or results of operations.

13. Segment Reporting

     Segment information is prepared on the same basis that the Company’s management reviews financial information for decision making purposes. The Company has three reportable operating segments: retail coffeehouses, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. All of the segment sales are from external customers.

      Retail Coffeehouses

     The Company’s retail segment operated 411 company-owned coffeehouses located in 16 states and the District of Columbia, as of July 4, 2010. The coffeehouses offer customers high-quality premium coffee and espresso-based beverages, and also offer specialty teas, baked goods, whole bean coffee, branded merchandise and related products.

      Commercial

     The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues, and on-line customers.

      Franchise

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of July 4, 2010, there were 128 franchised coffeehouses in U.S and international markets.

     The tables below present information by operating segment for the thirteen and twenty-six weeks ended July 4, 2010 and June 28, 2009 (in thousands):

Thirteen weeks ended July 4, 2010

														Unallocated
		Retail Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	57,751			$	8,660			$	2,474			$	—			$	68,885
Costs of sales and related occupancy costs			23,475				5,668				1,408				—				30,551
Operating expenses			23,598				1,104				365				—				25,067
Depreciation and amortization			3,010				14				4				—				3,028
General and administrative expenses			2,122				—				—				5,511				7,633
Operating income (loss)		$	5,546			$	1,874			$	697			$	(5,511	)		$	2,606
Identifiable assets		$	33,392			$	233			$	57			$	7,667			$	41,349
Net capital expenditures		$	199			$	73			$	—			$	328			$	600

Thirteen weeks ended June 28, 2009

														Unallocated
		Retail Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	55,294			$	5,735			$	1,925			$	—			$	62,954
Costs of sales and related occupancy costs			22,463				3,784				1,070				—				27,317
Operating expenses			22,712				872				286				—				23,870
Depreciation and amortization			3,557				12				1				—				3,570
General and administrative expenses			1,887				—				—				4,905				6,789
Operating income (loss)		$	4,675			$	1,067			$	568			$	(4,905	)		$	1,405
Identifiable assets		$	43,727			$	113			$	10			$	8,491			$	52,341
Net capital expenditures		$	150			$	4			$	—			$	104			$	258

Twenty-six weeks ended July 4, 2010

														Unallocated
		Retail Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	113,348			$	17,647			$	4,940			$	—			$	135,935
Costs of sales and related occupancy costs			47,050				11,962				2,938				—				61,950
Operating expenses			47,279				2,083				667				—				50,029
Depreciation and amortization			6,139				26				7				—				6,172
General and administrative expenses			4,054				—				—				10,088				14,142
Operating income (loss)		$	8,826			$	3,576			$	1,328			$	(10,088	)		$	3,642
Identifiable assets		$	33,392			$	233			$	57			$	7,667			$	41,349
Net capital expenditures		$	775			$	73			$	57			$	521			$	1,426

Twenty-six weeks ended June 28, 2009

														Unallocated
		Retail Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	108,158			$	11,439			$	3,737			$	—			$	123,334
Costs of sales and related occupancy costs			44,183				7,297				2,109				—				53,589
Operating expenses			45,092				1,572				611				—				47,275
Depreciation and amortization			7,287				22				2				—				7,311
General and administrative expenses			3,849				—				—				9,529				13,378
Operating (loss) income		$	7,747			$	2,548			$	1,015			$	(9,529	)		$	1,781
Identifiable assets		$	43,727			$	113			$	10			$	8,491			$	52,341
Net capital expenditures		$	217			$	4			$	—			$	228			$	449

     All of the Company’s assets are located in the United States, and approximately 1% of the Company’s consolidated sales come from outside the United States. No customer accounts for 10% or more of the Company’s sales.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

     The information in this Management’s Discussion and Analysis section should be read in conjunction with the unaudited condensed consolidated financial statements and the notes included in Item 1 of Part I of this Form 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended January 3, 2010 contained in the our Form 10-K (File No. [000-51535]).

FORWARD-LOOKING STATEMENTS

     Certain statements in this report and other written or oral statements made by or on behalf of Caribou Coffee are “forward-looking statements” within the meaning of the federal securities laws. Statements regarding future events and developments and our future performance, as well as management’s current expectations, beliefs, plans, estimates or projections relating to the future, are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are: fluctuations in quarterly and annual results, incurrence of net losses, adverse effects of management focusing on implementation of a growth strategy, failure to develop and maintain the Caribou Coffee brand and other factors disclosed in the our filings with the Securities and Exchange Commission. We undertake no obligation to update any forward-looking statements in order to reflect events or circumstances that may arise after the date of this report.

Overview

     We are the second largest company-owned gourmet coffeehouse operator in the United States based on the number of coffeehouses. As of July 4, 2010, we had 539 retail locations, including 128 franchised. Our coffeehouses are located in 19 states, the District of Columbia and international markets. We focus on offering our customers high-quality gourmet coffee and espresso-based beverages, as well as specialty teas, baked goods, whole bean coffee, branded merchandise and related products. Additionally, we sell our high-quality whole bean and ground coffee to grocery stores, mass merchandisers, office coffee providers, airlines, hotels, sports and entertainment venues, college campuses and on-line customers. We focus on creating a unique experience for customers through a combination of high-quality products, a comfortable and welcoming coffeehouse environment and customer service.

     We will continue our efforts to increase comparable coffeehouse sales, including increasing brand awareness through marketing efforts and introducing new products and promotions. As our comparable coffeehouse sales increase, we expect our operating margins at those coffeehouses to improve as we expect to have greater ability to leverage our fixed expense.

     We intend to strategically expand our coffeehouse locations in our existing markets. Our goal is to expand our concept into a nationally recognized brand in the United States by opening new company-operated coffeehouses and partnering with qualified developers to open franchised coffeehouses while adding select international locations through franchising.

Critical Accounting Policies

     The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. Our Annual Report on Form 10-K for the fiscal year ended January 3, 2010, (File No. [000-51535]) includes a summary of the critical accounting policies we believe are the most important to aid in understanding our financial condition and results of operations. We believe those critical accounting policies are significant or involve additional management judgment due to the sensitivity of the methods, assumptions, and estimates necessary in determining the related asset and liability amounts.

Fiscal Periods

     Our fiscal year ends on the Sunday falling nearest to December 31. Each fiscal year consists of four 13-week quarters in a 52-week year and three 13-week quarters and one 14-week fourth quarter in a 53-week year. Fiscal year 2009 included 53 weeks. Each fiscal quarter reported herein will consist of two four-week months and one five-week month.

     Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended July 4, 2010 are not necessarily indicative of future results that may be expected for the year ending January 2, 2011.

Thirteen Weeks Ended July 4, 2010 vs. Thirteen Weeks Ended June 28, 2009

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations :

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 4,				June 28,				%				July 4,				June 28,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	57,751			$	55,294				4.4	%			83.8	%			87.8	%
Commercial and franchise			11,133				7,660				45.4	%			16.2	%			12.2	%
Total net sales			68,884				62,954				9.4	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			30,551				27,317				11.8	%			44.4	%			43.4	%
Operating expenses			25,067				23,873				5.0	%			36.4	%			37.9	%
Depreciation and amortization			3,028				3,570				(15.2	)%			4.4	%			5.7	%
General and administrative expenses			7,633				6,789				12.4	%			11.1	%			10.8	%
Operating income			2,606				1,405				85.5	%			3.8	%			2.2	%
Other income (expense):
Interest income			5				7				(28.6	)%			—	%			—	%
Interest expense			(64	)			(63	)			1.6	%			(0.1	)%			(0.1	)%
Income before provision for income taxes and noncontrolling interest			2,547				1,349				88.8	%			3.7	%			2.1	%
Provision for income taxes			20				59				(66.1	)%			—	%			0.1	%
Net income			2,527				1,290				96.0	%			3.7	%			2.0	%
Less: Net income attributable to noncontrolling interest			106				122				(13.1	)%			0.2	%			0.2	%
Net income attributable to Caribou Coffee Company, Inc.		$	2,421			$	1,168				107.3	%			3.5	%			1.9	%

Net Sales

     Net sales increased $5.9 million, or 9.4%, to $68.9 million in the second thirteen weeks of 2010 from $63.0 million in the second thirteen weeks of 2009. Each of our business segments contributed significantly to our consolidated revenue growth. Coffeehouse net sales increased $2.5 million, or 4.4%, to $57.8 million in the second thirteen weeks of 2010 from $55.3 million in the second thirteen weeks of 2009 due to increased traffic. Commercial and franchise sales increased by $3.5 million, or 45.4%, to $11.1 million for the second thirteen weeks of 2010 from $7.6 million for the second thirteen weeks of 2009 due to additional sales to new and existing customers and franchises.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $3.2 million, or 11.8%, to $30.6 million in the second thirteen weeks of 2010, from $27.3 million in the second thirteen weeks of

2009, primarily due to higher sales. On a dollar basis, this growth was attributable to increased volume across each of our operating segments. As a percentage of total net sales, cost of sales and related occupancy costs increased to 44.4% in the second thirteen weeks of 2010 from 43.4% in the second thirteen weeks of 2009. The increase as a percentage of sales was due to an overall mix change with a higher percentage of sales coming from the commercial and franchise segments.

      Operating expenses. Operating expenses increased $1.2 million, or 5.0%, to $25.1 million in the second thirteen weeks of fiscal 2010, from $23.9 million in the second thirteen weeks of 2009. On a dollar basis, this increase was primarily driven by an increase in variable expenses related to our increase in sales volume. Operating expenses as a percentage of total net sales decreased to 36.4% in the second thirteen weeks of 2010 from 37.9% in the second thirteen weeks of 2009 as we experienced operating efficiencies while making investments in marketing and product platforms to build our brand, drive traffic and increase the average amount our guests spend during each visit.

      Depreciation and amortization. Depreciation and amortization decreased $0.6 million, or 15.2%, to $3.0 million in the second thirteen weeks of 2010, from $3.6 million in the second thirteen weeks of 2009. This decrease in dollars is due to a lower depreciable asset base from reduced capital spending in 2009 and 2010 compared with previous years.

      General and administrative expenses. General and administrative increased $0.8 million, or 12.4%, to $7.6 million in the second thirteen weeks of 2010, from $6.8 million in the second thirteen weeks of 2009. As a percentage of total net sales, general and administrative expenses were 11.1% in the second thirteen weeks of 2010, compared to 10.8% in the second thirteen weeks of 2009. This increase is due to resources added in support of our marketing, product management and commercial activities in the latter half of 2009.

      Interest income. Interest income decreased slightly in the second thirteen weeks of 2010, as compared to the second thirteen weeks of 2009 due to less cash on hand during the period.

      Interest expense. Interest expense remained relatively flat at $0.1 million for both the second thirteen weeks of 2010 and 2009. We had no outstanding borrowings during the second thirteen weeks of 2010 or 2009.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the second thirteen weeks of fiscal 2010 and 2009.

Retail Coffeehouses

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 4,				June 28,								July 4,				June 28,
		2010				2009				% Change				2010				2009
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales, net		$	57,751			$	55,294				4.4	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			23,475				22,463				4.5	%			40.6	%			40.6	%
Operating expenses			23,598				22,712				3.9	%			40.9	%			41.1	%
Depreciation and amortization			3,010				3,557				(15.4	)%			5.2	%			6.4	%
General and administrative expenses			2,122				1,887				12.5	%			3.7	%			3.4	%
Operating income		$	5,546			$	4,675				18.6	%			9.6	%			8.5	%

     The retail segment operates company-owned coffeehouses. As of July 4, 2010, there were 411 company-owned coffeehouses in 16 states and the District of Columbia.

Coffeehouse sales

     Coffeehouse sales increased $2.5 million, or 4.4%, to $57.8 million in the second thirteen weeks of 2010 from $55.3 million in the second thirteen weeks of 2009. This increase is attributable to a 4.8% increase in comparable coffeehouse sales in the second thirteen weeks of 2010 as compared to the same period in 2009. The increase in comparable coffeehouse sales was driven by increased traffic in our coffeehouses and a higher average guest check, primarily due to higher food sales, attributable to the launch of hot cereal in our coffeehouses.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.0 million, or 4.5%, to $23.5 million in the second thirteen weeks of 2010, from $22.5 million for the second thirteen weeks of 2009. The increase in total dollars was driven primarily by increased cost of goods related to our 4.8% growth in comparable coffeehouse sales. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales remained flat at 40.6% for the second thirteen weeks of 2010 and the second thirteen weeks of 2009 due to higher costs associated with a shift to higher quality product platforms launched in our retail coffeehouse segment, particularly shifting from a powder based chocolate ingredient to real, all natural chocolate in all of our chocolate based beverages, offset by sales leverage gained on largely fixed occupancy costs.

      Operating expenses. Operating expenses increased $0.9 million, or 3.9%, to $23.6 million for the second thirteen weeks of 2010, from $22.7 million for the second thirteen weeks of 2009. On a dollar basis, this increase was due to an increase in variable expenses, such as supplies and credit card fees related to our 4.8% increase in comparable coffeehouses sales, as well as $0.2 million in incremental spending on marketing and product management initiatives in the retail coffeehouse segment, when compared to the prior year. As a percentage of coffeehouse net sales, operating expenses decreased to 40.9% in the second thirteen weeks of 2010 from 41.1% in the second thirteen weeks of 2009. This decrease is primarily attributable to leverage gained from our increase in sales, particularly in labor costs.

      Depreciation and amortization. Depreciation and amortization decreased $0.6 million, or 15.4%, to $3.0 million for the second thirteen weeks of 2010, from $3.6 million for the second thirteen weeks of 2009. This decrease is due to our lower depreciable asset base due to lower levels of capital spending in 2009 and the first and second quarters of 2010.

      General and administrative expenses. General and administrative expenses increased $0.2 million, or 12.5%, to $2.1 million for the second thirteen weeks of 2010 from $1.9 million for the second thirteen weeks of 2009. The increase was primarily due to higher payroll related costs, particularly medical costs, in our retail coffeehouse field support and multi-unit management teams.

Commercial

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 4,				June 28,								July 4,				June 28,
		2010				2009				% Change				2010				2009
		(In thousands)												As a % of commercial sales
Sales, net		$	8,660			$	5,735				51.0	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			5,668				3,784				49.8	%			65.5	%			66.0	%
Operating expenses			1,104				872				26.5	%			12.7	%			15.2	%
Depreciation and amortization			14				12				27.3	%			0.2	%			0.2	%
Operating income		$	1,874			$	1,067				75.5	%			21.6	%			18.6	%

     The commercial segment sells high-quality premium whole bean and ground coffee to grocery stores, mass merchandisers, club stores, office coffee and foodservice providers, hotels, entertainment venues and on-line customers. In addition, we sell our blended coffees and license our brand to Keurig for sale and use in its K-Cup single serve line of business.

Sales

     Sales increased $3.0 million, or 51.0%, to $8.7 million in the second thirteen weeks of 2010, from $5.7 million in the second thirteen weeks of 2009. This increase is primarily attributable to the incremental sales to existing grocery stores, club stores and mass merchandisers, in which Caribou handles sales and distribution, as well as increased sales to Keurig Incorporated, an industry leader in single cup brewing technology. The increase in sales to Caribou managed accounts was primarily driven by increased distribution gained in the second half of 2009. At the beginning of 2010, Caribou Coffee was found in over forty states and in seven thousand stores through our Caribou managed sales channel. We did not experience large new customer door growth in the second quarter of 2010. The increase in sales to Keurig has primarily been driven by an increased sales and penetration of Keurig single-cup brewing machines.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.9 million, or 49.8%, to $5.7 million for the second thirteen weeks of 2010, from $3.8 million for the second thirteen weeks of 2009. On a dollar basis, this increase in cost of sales was primarily related to the 51.0% increase in sales volume in this segment. As a percentage of sales, cost of sales decreased to 65.5% for the second thirteen weeks of 2010, from 66.0% for the second thirteen weeks of 2009. The decrease in cost of sales as a percentage of sales was due to lower levels of trade promotions and allowances specifically in the latter half of the second thirteen weeks of 2010 compared to the latter half of the same period in 2009.

      Operating expenses. Operating expenses increased $0.2 million, or 26.5%, to $1.1 million for the second thirteen weeks of 2010, from $0.9 million for the second thirteen weeks of 2009. The increase is attributable to higher labor, marketing, and other operating costs as we invest in our team and infrastructure to support our growing commercial segment. As a percentage of sales, operating expenses decreased to 12.7% in the second thirteen weeks of 2010 from 15.2% in the second thirteen weeks of 2009 due to leverage on higher sales.

Franchise

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 4,				June 28,								July 4,				June 28,
		2010				2009				% Change				2010				2009
		(In thousands)												As a % of franchise sales
Sales, net		$	2,474			$	1,925				28.6	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			1,408				1,070				31.6	%			56.9	%			55.6	%
Operating expenses			365				286				27.6	%			14.8	%			14.9	%
Depreciation and amortization			4				1				300.0	%			0.2	%			0.1	%
Operating income		$	697			$	568				22.9	%			28.2	%			29.5	%

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of July 4, 2010, there were 128 franchised coffeehouses in the U.S and international markets.

Sales

     Sales increased $0.6 million, or 28.6%, to $2.5 million in the second thirteen weeks of 2010, from $1.9 million in the second thirteen weeks of 2009 primarily due to higher product sales to our franchisees, especially internationally, due to product pipeline fill for new stores to be opened in 2010.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $0.3 million, or 31.6%, to $1.4 million for the second thirteen weeks of 2010, from $1.1 million for the second thirteen weeks of 2009. As a percentage of sales, cost of sales and related occupancy costs increased to 56.9% for the second thirteen weeks of 2010, from 55.6% for the second thirteen weeks of 2009. The increase in cost of sales and related occupancy costs as a percentage of sales was primarily due to a change in revenue mix in the franchise segment, as a greater portion of sales were product sales.

      Operating expenses. Operating expenses remained relatively flat for the second thirteen weeks of 2010 compared to the second thirteen weeks of 2009. Operating expenses in this segment are primarily related to labor, travel, and other administrative costs.

Unallocated Corporate

		Thirteen Weeks Ended												Thirteen Weeks Ended
		July 4,				June 28,								July 4,				June 28,
		2010				2009				% Change				2010				2009
		(In thousands)												As a % of total net sales
General and administrative expenses			5,511				4,905				12.4	%			8.0	%			7.8	%
Operating loss		$	(5,511	)		$	(4,905	)			12.4	%			8.0	%			7.8	%

      General and administrative expenses. General and administrative expenses increased $0.6 million, or 12.4%, to $5.5 million for the second thirteen weeks of 2010, from $4.9 million for the second thirteen weeks of 2009. As a percentage of total net sales, general and administrative expenses increased to 8.0% in the second thirteen weeks of 2010, from 7.8% in the second thirteen weeks of 2009, due to higher payroll costs for support personnel hired in the latter half of 2009.

Twenty-Six Weeks Ended July 4, 2010 vs. Twenty-Six Weeks Ended June 28, 2009

Results of Operations

     The following table presents the consolidated statements of operations as well as the percentage relationship to total net sales of items included in our consolidated statement of operations :

		Twenty-Six Weeks Ended												Twenty-Six Weeks Ended
		July 4,				June 28,				%				July 4,				June 28,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	113,348			$	108,158				4.8	%			83.4	%			87.7	%
Commercial and franchise			22,587				15,176				48.8	%			16.6	%			12.3	%
Total net sales			135,935				123,334				10.2	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			61,950				53,589				15.6	%			45.6	%			43.5	%
Operating expenses			50,029				47,275				5.8	%			36.8	%			38.3	%
Depreciation and amortization			6,172				7,311				(15.6	)%			4.5	%			5.9	%
General and administrative expenses			14,142				13,378				5.7	%			10.4	%			10.8	%
Operating income			3,642				1,781				104.5	%			2.7	%			1.4	%
Other income (expense):
Interest income			10				7				42.9	%			—	%			—	%
Interest expense			(171	)			(121	)			41.3	%			(0.1	)%			(0.1	)%
Income before benefit from income taxes and noncontrolling interest			3,481				1,667				108.8	%			2.6	%			1.4	%
Benefit from income taxes			(138	)			(42	)			226.2	%			(0.1	)%			—	%
Net income			3,619				1,709				111.7	%			2.7	%			1.4	%
Less: Net income attributable to noncontrolling interest			160				195				(17.9	)%			0.1	%			0.2	%
Net income attributable to Caribou Coffee Company, Inc.		$	3,459			$	1,514				128.4	%			2.5	%			1.2	%

Net Sales

     Net sales increased $12.6 million, or 10.2%, to $135.9 million in the first twenty-six weeks of 2010 from $123.3 million in the first twenty-six weeks of 2009. Each of our business segments contributed significantly to our consolidated revenue growth. Coffeehouse net sales increased $5.2 million, or 4.8%, to $113.3 million in the first twenty-six weeks of 2010 from $108.1 million in the first twenty-six weeks of 2009. Commercial and franchise sales increased by $7.4 million, or 48.8%, to $22.6 million for the first twenty-six weeks of 2010 from $15.2 million for the first twenty-six weeks of 2009. Commercial segment sales grew by $6.2 million or 54.3%, based on increased sales to existing customers, primarily due to distribution growth achieved during the second half of 2009. Franchise sales grew by $1.2 million or 32.2% primarily due to new franchise and license locations added in the second half of last year, as well as international product sales related to new store development pipeline fill.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $8.4 million, or 15.6%, to $62.0 million in the first twenty-six weeks of 2010, from $53.6 million in the first twenty-six weeks of 2009, primarily due to higher sales. On a dollar basis, this growth was attributable to increased volume across each of our operating segments. As a percentage of total net sales, cost of sales and related occupancy costs increased to 45.6% in the first twenty-six weeks of 2010 from 43.5% in the first twenty-six weeks of 2009. The increase as a percentage of sales was due to an overall mix change with a higher percentage of sales coming from the commercial and franchise segments. In addition, we invested in higher levels of trade promotional programs in our commercial segment and invested in higher quality product platforms launched in our retail coffeehouse segment.

      Operating expenses. Operating expenses increased $2.7 million, or 5.9%, to $50.0 million in the first twenty-six weeks of fiscal 2010, from $47.3 million in the first twenty-six weeks of 2009. On a dollar basis, this increase was primarily driven by an increase in variable expenses related to our increase in sales volume, as well as a $1.1 million increase in marketing and product management initiatives as compared to the comparable period of the prior year. Operating expenses as a percentage of total net sales decreased to 36.8% in the first twenty-six weeks of 2010 from 38.3% in the first twenty-six weeks of 2009 as we were able to gain leverage on these categories from our increase in sales, particularly in labor costs needed to support our operating segments.

      Depreciation and amortization. Depreciation and amortization decreased $1.1 million, or 15.6%, to $6.2 million in the first twenty-six weeks of 2010, from $7.3 million in the first twenty-six weeks of 2009. As a percentage of total net sales, depreciation and amortization was 4.5% in the first twenty-six weeks of 2010, compared to 5.9% in the first twenty-six weeks of 2009. This decrease in dollars is due to a lower depreciable asset base from reduced capital spending in 2009 and the first and second quarters of 2010 compared to previous years, and the decrease as a percent of sales is due to better leverage from our increasing sales volume.

      General and administrative expenses. General and administrative expenses increased $0.7 million, or 5.6%, to $14.1 million in the first twenty-six weeks of 2010, from $13.4 million in the first twenty-six weeks of 2009. As a percentage of total net sales, general and administrative expenses was 10.4% in the first twenty-six weeks of 2010, compared to 10.9% in the first twenty-six weeks of 2009. This increase in expense is due to higher payroll costs for support personnel hired in the later half of 2009.

      Interest income. Interest income increased slightly in the first twenty-six weeks of 2010, as compared to the first twenty-six weeks of 2009 due to more cash on hand in 2010.

      Interest expense. Interest expense remained relatively flat at $0.2 million and $0.1 million, respectively, for both the first twenty-six weeks of 2010 and 2009. We had no outstanding borrowings during first twenty-six weeks of 2010 or 2009.

Operating Segments

     Segment information is prepared on the same basis that our management reviews financial information for decision making purposes. We have three reportable operating segments: retail, commercial and franchise. “Unallocated corporate” includes expenses pertaining to corporate administrative functions that support the operating segments but are not specifically attributable to or managed by any segment and are not included in the reported financial results of the operating segments. The following tables summarize our results of operations by segment for the first twenty-six weeks of fiscal 2010 and 2009.

Retail Coffeehouses

		Twenty-Six Weeks Ended												Twenty-Six Weeks Ended
		July 4,				June 28,								July 4,				June 28,
		2010				2009				% Change				2010				2009
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales, net		$	113,348			$	108,158				4.8	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			47,050				44,183				6.5	%			41.5	%			40.9	%
Operating expenses			47,279				45,092				4.9	%			41.7	%			41.7	%
Depreciation and amortization			6,139				7,287				(15.8	)%			5.4	%			6.7	%
General and administrative expenses			4,054				3,849				5.3	%			3.6	%			3.6	%
Operating income		$	8,826			$	7,747				13.7	%			7.8	%			7.2	%