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 October 3, 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.

     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 November 12, 2010, 20,041,873 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 October 3, 2010

Table of Contents

		PART I. FINANCIAL INFORMATION
Item 1.		Financial Statements			3
		Condensed Consolidated Statements of Operations			3
		Condensed Consolidated Balance Sheets			4
		Condensed Consolidated Statement of Changes in Equity			5
		Condensed Consolidated Statements of Cash Flows			6
		Notes to Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			28
Item 4T.		Controls and Procedures			28
		PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			29
Item 1A.		Risk Factors			29
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3.		Defaults Upon Senior Securities			29
Item 4.		Reserved			29
Item 5.		Other Information			29
Item 6.		Exhibits			30
Signature					31

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								Thirty-Nine Weeks Ended
		October 3,				September 27,				October 3,				September 27,
		2010				2009				2010				2009
		(In thousands, except for per share amounts)
		(Unaudited)
Coffeehouse sales		$	56,626			$	54,479			$	169,974			$	162,637
Commercial and franchise sales			13,547				8,260				36,134				23,436
Total net sales			70,173				62,739				206,108				186,073
Cost of sales and related occupancy costs			32,701				27,849				94,651				81,438
Operating expenses			25,130				24,426				75,159				71,684
Depreciation and amortization			3,099				3,465				9,271				10,776
General and administrative expenses			7,421				6,313				21,563				19,708
Operating income			1,822				686				5,464				2,467
Other income (expense):
Interest income			9				10				19				17
Interest expense			(63	)			(68	)			(234	)			(189	)
Income before provision for (benefit from) income taxes			1,768				628				5,249				2,295
Provision for (benefit from) income taxes			32				(140	)			(106	)			(182	)
Net income			1,736				768				5,355				2,477
Less: Net income attributable to noncontrolling interest			129				114				289				309
Net Income attributable to Caribou Coffee Company, Inc.		$	1,607			$	654			$	5,066			$	2,168
Basic net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.08			$	0.03			$	0.26			$	0.11
Diluted net income attributable to Caribou Coffee Company, Inc. common shareholders per share		$	0.08			$	0.03			$	0.25			$	0.11
Basic weighted average number of shares outstanding			19,610				19,470				19,599				19,418
Diluted weighted average number of shares outstanding			20,710				20,169				20,540				19,830

See accompanying notes.

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

CONDENSED CONSOLIDATED BALANCE SHEETS

		October 3,				January 3,
		2010				2010
		(In thousands, except per share amounts)
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	10,018			$	23,578
Accounts receivable (net of allowance for doubtful accounts of $3 at October 3, 2010 and January 3, 2010)			9,130				5,887
Other receivables (net of allowance for doubtful accounts of $202 and $128 at October 3, 2010 and January 3, 2010, respectively)			1,806				1,268
Income tax receivable			102				193
Inventories			31,182				13,278
Prepaid expenses and other current assets			1,085				1,546
Total current assets			53,323				45,750
Property and equipment, net of accumulated depreciation and amortization			42,228				47,135
Restricted cash			605				605
Other assets			403				237
Total assets		$	96,559			$	93,727
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	10,350			$	9,042
Accrued compensation			6,821				6,296
Accrued expenses			6,476				7,563
Deferred revenue			5,847				8,747
Total current liabilities			29,494				31,648
Asset retirement liability			1,176				1,120
Deferred rent liability			6,716				7,955
Deferred revenue			2,072				2,072
Income tax liability			2				156
Total long term liabilities			9,966				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; 20,042 and 19,814 shares issued and outstanding at October 3, 2010 and January 3, 2010, respectively			200				198
Additional paid-in capital			127,964				126,770
Accumulated other comprehensive income (loss)			21				(7	)
Accumulated deficit			(71,275	)			(76,341	)
Total Caribou Coffee Company, Inc. shareholders’ equity			56,910				50,620
Noncontrolling interest			189				156
Total equity			57,099				50,776
Total liabilities and equity		$	96,559			$	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)

																		Accumulated
		Common Stock								Additional								Other
		Number of								Paid-In				Noncontrolling				Comprehensive				Accumulated
		Shares				Amount				Capital				Interest				Income (loss)				Deficit				Equity
Balance, January 3, 2010			19,814			$	198			$	126,770			$	156			$	(7	)		$	(76,341	)		$	50,776
Net income			—				—				—				289				—				5,066				5,355
Changes in fair value of derivative financial instruments			—				—				—				—				28				—				28
Comprehensive income																										$	5,383
Share based compensation			—				—				967				—				—				—				967
Options exercised			45				—				302				—				—				—				302
Restricted shares issued, net of cancellations			193				2				(2	)			—				—				—				—
Distribution of noncontrolling interest			—				—				—				(256	)			—				—				(256	)
Stock repurchase			(10	)			—				(73	)			—				—				—				(73	)
Balance, October 3, 2010			20,042			$	200			$	127,964			$	189			$	21			$	(71,275	)		$	57,099

See accompanying notes.

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

		Thirty-Nine Weeks Ended
		October 3,				September 27,
		2010				2009
		(In thousands)
		(Unaudited)
Operating activities
Net income attributable to Caribou Coffee Company, Inc.		$	5,066			$	2,168
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization			10,748				12,360
Amortization of deferred financing fees			121				99
Noncontrolling interest			289				309
Stock-based compensation			967				664
Other			(185	)			73
Changes in operating assets and liabilities:
Accounts receivable and other receivables			(3,690	)			(469	)
Inventories			(17,904	)			(2,240	)
Prepaid expenses and other assets			472				241
Accounts payable			284				1,545
Accrued expenses and other liabilities			(1,501	)			(2,250	)
Deferred revenue			(2,900	)			(3,918	)
Net cash (used) provided by operating activities			(8,233	)			8,582
Investing activities
Payments for property and equipment			(5,024	)			(845	)
Proceeds from the disposal of property			22				36
Net cash used in investing activities			(5,002	)			(809	)
Financing activities
Distribution of noncontrolling interest			(256	)			(195	)
Purchase of noncontrolling interest			—				(105	)
Issuance of common stock			302				584
Payment of debt financing fees			(298	)			(31	)
Stock repurchase			(73	)			—
Net cash (used) provided by financing activities			(325	)			253
(Decrease) increase in cash and cash equivalents			(13,560	)			8,026
Cash and cash equivalents at beginning of period			23,578				11,060
Cash and cash equivalents at end of period		$	10,018			$	19,086
Supplemental disclosure of cash flow information
Noncash financing and investing transactions:
Accrual for leasehold improvements, furniture and equipment		$	1,024			$	—

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 October 3, 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 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 October 3, 2010, the Company had accumulated net derivative gains of less than $0.1 million in prepaid expenses and other current assets. As of January 3, 2010, the Company had accumulated net derivative losses of less than $0.1 million in OCI and in accrued expenses. The gains and losses pertain 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 October 3, 2010 the Company had dairy commodity futures contracts representing approximately nine hundred fifty thousand gallons. The Company’s cash flow derivative instruments contain credit-risk-related contingent features. At October 3, 2010, the Company has no collateral posted related to these contingent features.

     The following table presents the gains and losses of the Company’s derivative financial instruments for the thirteen and thirty-nine week periods ended October 3, 2010 and September 27, 2009 (in thousands):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 3,				September 27,				October 3				September 27,
		2010				2009				2010				2009
Derivatives designated as hedging instruments		$	7			$	(44	)		$	(28	)		$	(44	)
Derivatives not designated as hedging instruments		$	—			$	96			$	—			$	223

     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 October 3, 2010 (in thousands):

		Total				Level 1				Level 2				Level 3
Assets:
Cash and cash equivalents
Cash deposits		$	5,982			$	5,982			$	—			$	—
Money market funds		$	4,036			$	4,036			$	—			$	—
Derivatives		$	21			$	21			$	—			$	—

     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
Cash deposits		$	1,557			$	1,557			$	—			$	—
Money market funds		$	22,021			$	22,021			$	—			$	—
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 and liabilities 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):

		October 3,				January 3,
		2010				2010
Coffee		$	24,219			$	5,615
Other merchandise held for sale			4,059				4,029
Supplies			2,905				3,634
		$	31,183			$	13,278

     At October 3, 2010 and January 3, 2010, the Company had committed to fixed price purchase commitments, primarily for green coffee, aggregating approximately $25.3 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, 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 October 3, 2010 and September 27, 2009 was approximately $0.3 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 thirty-nine weeks ended October 3, 2010 and September 27, 2009 was approximately $1.0 million and $0.7 million, respectively.

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

										Weighted
						Weighted				Average
		Number of				Average				Contract
		Shares				Exercise Price				Life
Outstanding, January 3, 2010			1,696			$	4.27			7.54 Yrs
Exercised			(5	)		$	5.72
Forfeited			(26	)		$	6.09
Outstanding, April 4, 2010			1,665			$	4.23			7.31 Yrs
Exercised			(25	)		$	7.05
Forfeited			(10	)		$	6.32
Outstanding, July 4, 2010			1,630			$	4.18			7.10 Yrs
Exercised			(15	)		$	6.41
Forfeited			(10	)		$	6.22
Outstanding, October 3, 2010			1,605			$	4.15			6.89 Yrs
Options vested at October 3, 2010			983			$	5.23			6.28 Yrs

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

										Weighted
						Weighted				Average
		Number of				Average Grant Date				Contract
		Shares				Fair Value				Life
Outstanding, January 3, 2010			300			$	5.83			3.50 Yrs
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
Granted			—			$
Vested			(78	)		$	5.54
Forfeited			(20	)		$	7.68
Outstanding, October 3, 2010			405			$	6.43			2.91 Yrs

8. Income Taxes

     During the thirteen and thirty-nine weeks ended October 3, 2010, the Company recognized a tax provision of less than $0.1 million and a 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 October 3, 2010 due to the uncertainty of realizing such deferred income tax assets. During the thirteen and thirty-nine weeks ended September 27, 2009, the Company recognized a tax benefit of $0.1 million and $0.2 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 and thirty-nine week periods ended October 3, 2010 and September 27, 2009, were as follows (in thousands, except per share data):

		Thirteen Weeks Ended								Thirty-Nine Weeks Ended
		October 3,				September 27,				October 3				September 27,
		2010				2009				2010				2009
Net income attributable to Caribou Coffee Company, Inc.		$	1,607			$	654			$	5,066			$	2,168
Weighted average common shares outstanding — basic			19,610				19,470				19,599				19,418
Dilutive impact of stock-based compensation			1,100				699				941				412
Weighted average common shares outstanding — dilutive			20,710				20,169				20,540				19,830
Basic net income per share		$	0.08			$	0.03			$	0.26			$	0.11
Diluted net income per share		$	0.08			$	0.03			$	0.25			$	0.11

     For the thirteen week periods ended October 3, 2010 and September 27, 2009, 0.1 million and 0.4 million stock options, respectively, and for the thirty-nine week periods ended October 3, 2010 and September 27, 2009, 0.2 million and 0.6 million stock options, respectively were excluded from the calculation of shares applicable to diluted net income 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 per location 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 October 3, 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 October 3, 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 October 3, 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 the 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 a 0.5% commitment fee on any unused portion of the facility. There are no amounts outstanding under the new facility at October 3, 2010 or under the previous facility at January 3, 2010.

     Unamortized deferred financing fees capitalized on the balance sheet totaled $0.2 million and $0.1 million as of October 3, 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

     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 410 company-owned coffeehouses located in 16 states and the District of Columbia, as of October 3, 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 October 3, 2010, there were 129 franchised coffeehouses in U.S and international markets.

     The tables below present information by operating segment for the thirteen and thirty-nine weeks ended October 3, 2010 and September 27, 2009 (in thousands):

Thirteen weeks ended October 3, 2010

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	56,626			$	11,255			$	2,292			$	—			$	70,173
Costs of sales and related occupancy costs			23,694				7,706				1,301				—				32,701
Operating expenses			23,666				1,140				324				—				25,130
Depreciation and amortization			3,079				16				4				—				3,099
General and administrative expenses			2,276				—				—				5,145				7,421
Operating income (loss)		$	3,911			$	2,393			$	663			$	(5,145	)		$	1,822
Identifiable assets		$	33,201			$	352			$	53			$	8,622			$	42,228
Net capital expenditures		$	3,652			$	508			$	—			$	333			$	4,493

Thirteen weeks ended September 27, 2009

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	54,479			$	6,557			$	1,703			$	—			$	62,739
Costs of sales and related occupancy costs			22,644				4,232				973				—				27,849
Operating expenses			23,127				1,010				289				—				24,426
Depreciation and amortization			3,454				10				1				—				3,465
General and administrative expenses			1,742				—				—				4,571				6,313
Operating income (loss)		$	3,512			$	1,305			$	440			$	(4,571	)		$	686
Identifiable assets		$	40,896			$	107			$	9			$	7,932			$	48,944
Net capital expenditures		$	483			$	4			$	—			$	92			$	579

Thirty-nine weeks ended October 3, 2010

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	169,974			$	28,902			$	7,232			$	—			$	206,108
Costs of sales and related occupancy costs			70,744				19,668				4,239				—				94,651
Operating expenses			70,945				3,223				991				—				75,159
Depreciation and amortization			9,218				42				11				—				9,271
General and administrative expenses			6,245				—				—				15,318				21,563
Operating income (loss)		$	12,822			$	5,969			$	1,991			$	(15,318	)		$	5,464
Identifiable assets		$	33,201			$	352			$	53			$	8,622			$	42,228
Net capital expenditures		$	4,454			$	581			$	56			$	855			$	5,946

Thirty-nine weeks ended September 27, 2009

		Retail												Unallocated
		Coffeehouses				Commercial				Franchise				Corporate				Total
Total net sales		$	162,637			$	17,996			$	5,440			$	—			$	186,073
Costs of sales and related occupancy costs			66,827				11,529				3,082				—				81,438
Operating expenses			68,219				2,582				900				—				71,684
Depreciation and amortization			10,741				32				3				—				10,776
General and administrative expenses			5,591				—				—				14,100				19,708
Operating (loss) income		$	11,259			$	3,853			$	1,455			$	(14,100	)		$	2,467
Identifiable assets		$	40,896			$	107			$	9			$	7,932			$	48,944
Net capital expenditures		$	701			$	8			$	—			$	319			$	1,028

     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 October 3, 2010, we had 539 retail locations, including 129 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. Our critical accounting policy related to income taxes has been updated below. We believe the critical accounting policies included in our Annual Report on Form 10-K and our updated critical accounting policy below for income taxes 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.

      Income taxes . We provide for income taxes based on our estimate of federal and state tax liabilities. These estimates include, among other items, effective rates for state and local income taxes, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on the information available to us at the time we prepare the income tax provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

     Deferred income tax assets and liabilities are recognized for the expected future income tax benefits or consequences of loss carryforwards and temporary differences between the book and tax basis of assets and liabilities. We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we establish valuation allowances to offset any deferred tax asset recorded. The valuation allowance is based upon historical taxable income. In evaluating whether the Company would more likely than not recover these deferred tax assets, it has not assumed any future taxable income or tax planning strategies in the jurisdictions associated with these carryforwards where history does not support such an assumption. Given that we have had net operating losses, we have recognized a valuation allowance equal to 100% of our net deferred tax assets. As of January 3, 2010, our loss carryforward was $31.9 million and we had a valuation allowance aggregating $29.4 million recorded such that net deferred income tax assets were fully reserved at such date. Future income generation or implementation of tax planning strategies to recover these deferred tax assets in these jurisdictions could lead to the reversal of these valuation allowances and a reduction of income tax expense or increase in income tax benefit. The net operating loss carryforwards will begin to expire in 2011, if not utilized.

     Though the validity of any tax position is a matter of tax law, the body of statutory, regulatory and interpretive guidance on the application of the law is complex and often ambiguous. Because of this, whether a tax position will ultimately be sustained may be uncertain. Our recognition of an uncertain tax position is dependent on whether or not that position is more likely than not of being sustained upon audit by the relevant taxing authority. If an uncertain tax position is more likely than not of being sustained, the position must be recognized at the largest amount that is more likely than not to be sustained. No portion of an uncertain tax position will be recognized if the position has less than a 50% likelihood of being sustained.

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 consist of two four-week periods and one five-week period.

     Our sales are somewhat seasonal, with the fourth quarter accounting for the highest sales volumes. Operating results for the thirteen week period ended October 3, 2010 are not necessarily indicative of future results that may be expected for the year ending January 2, 2011.

Thirteen Weeks Ended October 3, 2010 vs. Thirteen Weeks Ended September 27, 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
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	56,626			$	54,479				3.9	%			80.7	%			86.8	%
Commercial and franchise			13,547				8,260				64.0	%			19.3	%			13.2	%
Total net sales			70,173				62,739				11.8	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			32,701				27,849				17.4	%			46.6	%			44.4	%
Operating expenses			25,130				24,426				2.9	%			35.8	%			38.9	%
Depreciation and amortization			3,099				3,465				(10.6	)%			4.4	%			5.5	%
General and administrative expenses			7,421				6,313				17.6	%			10.6	%			10.1	%
Operating income			1,822				686				165.6	%			2.6	%			1.1	%
Other income (expense):
Interest income			9				10				(10.0	)%			—	%			—	%
Interest expense			(63	)			(68	)			(7.4	)%			(0.1	)%			(0.1	)%
Income before provision for (benefit from) income taxes and noncontrolling interest			1,768				628				181.5	%			2.5	%			1.0	%
Provision for (benefit from) income taxes			32				(140	)			(122.9	)%			—	%			(0.2	)%
Net income			1,736				768				126.0	%			2.5	%			1.2	%
Less: Net income attributable to noncontrolling interest			129				114				13.2	%			0.2	%			0.2	%
Net income attributable to Caribou Coffee Company, Inc.		$	1,607			$	654				145.7	%			2.3	%			1.0	%

Net Sales

     Net sales increased $7.5 million, or 11.8%, to $70.2 million in the third thirteen weeks of 2010 from $62.7 million in the third thirteen weeks of 2009. Each of our business segments contributed significantly to our consolidated revenue growth. Coffeehouse net sales increased $2.1 million, or 3.9%, to $56.6 million in the third thirteen weeks of 2010 from $54.5 million in the third thirteen weeks of 2009 due to higher comparable coffeehouse sales. Commercial and franchise sales increased by $5.3 million, or 64.0%, to $13.5 million for the third thirteen weeks of 2010 from $8.3 million for the third 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 $4.9 million, or 17.4%, to $32.7 million in the third thirteen weeks of 2010, from $27.8 million in the third 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 46.6% in the third thirteen weeks of 2010 from 44.4% in the third 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 $0.7 million, or 2.9%, to $25.1 million in the third thirteen weeks of fiscal 2010, from $24.4 million in the third 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 35.8% in the third thirteen weeks of 2010 from 38.9% in the third thirteen weeks of 2009 as we were able to gain leverage on fixed costs within these categories from our increase in sales and lower marketing spend in the quarter.

      Depreciation and amortization. Depreciation and amortization decreased $0.3 million, or 10.6%, to $3.1million in the third thirteen weeks of 2010, from $3.5 million in the third thirteen weeks of 2009. As a percentage of total net sales, depreciation and amortization was 4.4% in the third thirteen weeks of 2010, compared to 5.5% in the third thirteen weeks of 2009. This decrease in dollars is due to a lower depreciable asset base from reduced capital spending in 2009 and 2010, 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 expense increased $1.1 million, or 17.6%, to $7.4 million in the third thirteen weeks of 2010, from $6.3 million in the third thirteen weeks of 2009. As a percentage of total net sales, general and administrative expenses were 10.6% in the third thirteen weeks of 2010, compared to 10.1% in the third thirteen weeks of 2009. This increase is due to resources added in support of key initiatives, including marketing, product management, and real estate.

      Interest income. Interest income decreased slightly in the third thirteen weeks of 2010, as compared to the third 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 third thirteen weeks of 2010 and 2009. We had no outstanding borrowings during the third 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 third thirteen weeks of fiscal 2010 and 2009.

Retail Coffeehouses

		Thirteen Weeks Ended												Thirteen Weeks Ended
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of coffeehouse sales
Coffeehouse sales, net		$	56,626			$	54,479				3.9	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			23,694				22,644				4.6	%			41.8	%			41.6	%
Operating expenses			23,666				23,127				2.3	%			41.8	%			42.5	%
Depreciation and amortization			3,079				3,454				(10.9	)%			5.4	%			6.3	%
General and administrative expenses			2,276				1,742				30.7	%			4.0	%			3.2	%
Operating income		$	3,911			$	3,512				11.4	%			6.9	%			6.4	%

     The retail segment operates company-owned coffeehouses. As of October 3, 2010 and September 27, 2009, there were 410 and 413 company-owned coffeehouses, respectively, in 16 states and the District of Columbia.

Coffeehouse sales

     Coffeehouse sales increased $2.1 million, or 3.9%, to $56.6 million in the third thirteen weeks of 2010 from $54.5 million in the third thirteen weeks of 2009. This increase is attributable to a 4.4% increase in comparable coffeehouse sales in the third 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 at the beginning of the year and the phased rollout of breakfast sandwiches during the thirteen week period which are now in 200 of our coffeehouses.

Costs and Expenses

      Cost of sales and related occupancy costs. Cost of sales and related occupancy costs increased $1.1 million, or 4.6%, to $23.7 million in the third thirteen weeks of 2010, from $22.6 million for the third thirteen weeks of 2009. The increase in total dollars was driven primarily by increased cost of goods related to our 4.4% growth in comparable coffeehouse sales. Cost of sales and related occupancy costs as a percentage of coffeehouse net sales increased to 41.8% in the third thirteen weeks of 2010 from 41.6% in the third 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 $0.6 million, or 2.3%, to $23.7 million for the third thirteen weeks of 2010, from $23.1 million for the third thirteen weeks of 2009. On a dollar basis, this increase was due to an increase in variable expenses, such as credit card fees related to our 4.4% increase in comparable coffeehouses sales, as well as higher labor cost as we train our team members on our new product launches, such as breakfast sandwiches. As a percentage of coffeehouse net sales, operating expenses decreased to 41.8% in the third thirteen weeks of 2010 from 42.5% in the third thirteen weeks of 2009. This decrease is primarily attributable to leverage gained from our increase in sales and lower marketing spend in the third thirteen weeks of 2010 compared to the prior year period.

      Depreciation and amortization. Depreciation and amortization decreased $0.4 million, or 10.9%, to $3.1 million for the third thirteen weeks of 2010, from $3.5 million for the third 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 $0.6 million, or 30.7%, to $2.3 million for the third thirteen weeks of 2010 from $1.7 million for the third thirteen weeks of 2009. The increase was primarily due to the cost of building out our new store development teams as we prepare for future new store openings.

Commercial

		Thirteen Weeks Ended												Thirteen Weeks Ended
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of commercial sales
Sales, net		$	11,255			$	6,557				71.6	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			7,706				4,232				82.1	%			68.5	%			64.5	%
Operating expenses			1,140				1,010				12.9	%			10.1	%			15.4	%
Depreciation and amortization			16				10				60.0	%			0.1	%			0.2	%
Operating income		$	2,393			$	1,305				83.4	%			21.3	%			19.9	%

     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 $4.7 million, or 71.6%, to $11.3 million in the third thirteen weeks of 2010, from $6.6 million in the third thirteen weeks of 2009. We periodically align our inventory weeks of supply on hand across our various coffee blends. In the third quarter, we took advantage of the 13-year highs in the coffee commodity market, and sold $2.0 million of raw coffee beans for blends no longer needed. The remaining 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 third quarter of 2010. The increase in sales to Keurig has primarily been driven by an increased sales 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 $3.5 million, or 82.1%, to $7.7 million for the third thirteen weeks of 2010, from $4.2 million for the third thirteen weeks of 2009. On a dollar basis, this increase in cost of sales was primarily related to the 71.6% increase in sales volume in this segment. As a percentage of sales, cost of sales increased to 68.5% for the third thirteen weeks of 2010, from 64.5% for the third thirteen weeks of 2009. This increase in cost of sales as a percentage of sales was the sale of $2.0 million of raw coffee beans, which had a lower margin than our traditional commercial sales.

      Operating expenses. Operating expenses increased $0.1 million, or 12.9%, to $1.1 million for the third thirteen weeks of 2010, from $1.0 million for the third 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 10.1% in the third thirteen weeks of 2010 from 15.4% in the third thirteen weeks of 2009 due to leverage on higher sales.

Franchise

		Thirteen Weeks Ended												Thirteen Weeks Ended
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of franchise sales
Sales, net		$	2,292			$	1,703				34.6	%			100.0	%			100.0	%
Costs of sales and related occupancy costs			1,301				973				33.7	%			56.8	%			57.1	%
Operating expenses			324				289				12.1	%			14.1	%			17.0	%
Depreciation and amortization			4				1				300.0	%			0.2	%			0.1	%
Operating income		$	663			$	440				50.7	%			28.9	%			25.8	%

     The franchise segment sells franchises to operate Caribou Coffee brand coffeehouses to domestic and international franchisees. As of October 3, 2010 and September 27, 2009, there were 129 and 112 franchised coffeehouses, respectively, in the U.S and international markets.

Sales

     Sales increased $0.6 million, or 34.6%, to $2.3 million in the third thirteen weeks of 2010, from $1.7 million in the third 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 33.7%, to $1.3 million for the third thirteen weeks of 2010, from $1.0 million for the third thirteen weeks of 2009. As a percentage of sales, cost of sales and related occupancy costs decreased to 56.8% for the third thirteen weeks of 2010, from 57.1% for the third thirteen weeks of 2009. The decrease 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 in the form of franchise fees for newly opened franchises.

      Operating expenses. Operating expenses remained relatively flat for the third thirteen weeks of 2010 compared to the third 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
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of total net sales
General and administrative expenses			5,145				4,571				12.6	%			7.3	%			7.3	%
Operating loss		$	(5,145	)		$	(4,571	)			12.6	%			7.3	%			7.3	%

      General and administrative expenses. General and administrative expenses increased $0.5 million, or 12.6%, to $5.1 million for the third thirteen weeks of 2010, from $4.6 million for the third thirteen weeks of 2009. As a percentage of total net sales, general and administrative expenses remained flat at 7.3%.

Thirty-Nine Weeks Ended October 3, 2010 vs. Thirty-Nine Weeks Ended September 27, 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 :

		Thirty-Nine Weeks Ended												Thirty-Nine Weeks Ended
		October 3,				September 27,				%				October 3,				September 27,
		2010				2009				Change				2010				2009
		(In thousands)												As a % of total net sales
Statement of Operations Data:
Net sales:
Coffeehouse		$	169,974			$	162,637				4.5	%			82.5	%			87.4	%
Commercial and franchise			36,134				23,436				54.2	%			17.5	%			12.6	%
Total net sales			206,108				186,073				10.8	%			100.0	%			100.0	%
Cost of sales and related occupancy costs			94,651				81,438				16.2	%			45.9	%			43.8	%
Operating expenses			75,159				71,684				4.8	%			36.5	%			38.5	%
Depreciation and amortization			9,271				10,776				(14.0	)%			4.5	%			5.8	%
General and administrative expenses			21,563				19,708				9.4	%			10.5	%			10.6	%
Operating income			5,464				2,467				121.5	%			2.7	%			1.3	%
Other income (expense):
Interest income			19				17				11.8	%			—	%			—	%
Interest expense			(234	)			(189	)			23.8	%			(0.1	)%			(0.1	)%
Income before benefit from income taxes and noncontrolling interest			5,249				2,295				128.7	%			2.5	%			1.2	%
Benefit from income taxes			(106	)			(182	)			(41.8	)%			(0.1	)%			(0.1	)%