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Peets Coffee & Tea Inc – ‘10-K’ for 1/1/12

On:  Friday, 3/9/12, at 2:01pm ET   ·   For:  1/1/12   ·   Accession #:  1144204-12-13982   ·   File #:  0-32233

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

 3/09/12  Peets Coffee & Tea Inc            10-K        1/01/12   39:3.2M                                   Toppan Merrill/FA

Document/Exhibit                   Description                      Pages   Size 

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 FORM 10-K

For the transition period from             to              .

Commission file number 000-32233

PEET’S COFFEE & TEA, INC.

(Exact Name of Registrant as Specified in Its Charter)

1400 Park Avenue

Emeryville, California 94608-3520

(Address of Principal Executive Offices)(Zip Code)

(510) 594-2100

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known, seasoned issuer (as defined in Rule 405 of the Securities Act). Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 x No ¨

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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ¨   Accelerated Filer x    Non-Accelerated Filer ¨   Smaller reporting company ¨

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

The aggregate market value of the common stock held by non-affiliates of the registrant on July 1, 2011 (the last business day of the registrant’s most recently completed second quarter) was $484,203,776, based on the number of shares held by non-affiliates and the last sale price (as reported by the Nasdaq National Market) of common stock on July 1, 2011 ($59.42). Shares of common stock held by each executive officer, director and person known to the registrant to hold 10% or more of the outstanding common stock of the registrant have been excluded as such persons may be deemed to be affiliates. This calculation does not reflect a determination that such persons are affiliates for any other purpose. The registrant does not have non-voting common stock outstanding.

As of March 2, 2012, 13,197,832 shares of registrant’s common stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement related to the registrant's 2012 annual meeting of shareholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of the registrant's fiscal year ended January 1, 2012, are incorporated by reference into Part III of this annual report on Form 10-K.

References to “we”, “us”, “our”, “Peet’s”, and the “Company” in this annual report on Form 10-K refer to Peet’s Coffee & Tea, Inc. and its consolidated subsidiaries

CAUTIONARY STATEMENT RELEVANT TO FORWARD-LOOKING STATEMENTS

This annual report on Form 10-K (this "report"), including the sections entitled "Business," "Risk Factors" and "Management’s Discussion and Analysis of Financial Condition and Results of Operations," contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should read this report (including the documents that we incorporate by reference in, and have filed as exhibits to, this report) completely and with the understanding that our actual future results may be materially different from what is expressed, implied or forecasted in these forward-looking statements.

You can identify forward-looking statements by the words "may," "should," "could," "predict," "potential," "continue," "expect," "anticipate," "future," "intend," "plan," "believe," "estimate" and similar expressions (or the negative of such expressions). Forward-looking statements in this report include, without limitation, statements about our expected results of operations in 2012 (including the performance or other factors expected to drive those results) as well as statements about the coffee industry, the expected growth of specialty coffee, and related trends. The forward-looking statements included in this report are based on management’s beliefs, expectations, estimates and projections as of the date of this report.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other important factors, some of which are beyond our control or difficult to predict. Therefore, our actual results, performance, achievements or outcomes may differ materially from what is expressed, implied or forecasted by the forward-looking statements. Accordingly, you should not place undue reliance on the forward-looking statements included in this report, which speak only as of the date of this report. 

Among the important factors that could cause actual results to differ materially from those in the forward-looking statements are:

We discuss the factors listed above as well as other risks, uncertainties and important factors in greater detail in the section entitled "Risk Factors" under Part I, Item 1A below. The risks, uncertainties and factors discussed in this report may not be exhaustive and other unpredictable or unknown factors could also cause actual results to differ materially from those in forward-looking statements. Except as required by law, we assume no obligation to update publicly any forward-looking statements, or to update publicly the reasons actual results could differ materially from those expressed, implied or forecasted in any forward-looking statements, even if new information becomes available in the future.

PART I

Item 1. Business

Peet's Coffee & Tea is a specialty coffee roaster and marketer of fresh-roasted coffee and tea. We sell our Peet’s brand coffee and tea through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and foodservice accounts and, in six states, Company-owned and operated stores. In addition, we sell Godiva^® Chocolatier brand coffees in our grocery channel. We operate our business through two reportable segments: retail and specialty. See Note 14, “Segment Information” in the “Notes to Consolidated Financial Statements” included elsewhere in this report.

Our corporate website is located at www.peets.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments or exhibits to those reports, are available free of charge through our website at www.peets.com as soon as reasonably practicable after we file them with, or furnish them to, the Securities and Exchange Commission (“SEC”). The content on any website referred to in this report is not incorporated by reference into this report unless expressly noted. The Company was organized as a Washington corporation in 1971.

Company Retail Stores

As of January 1, 2012 we operated 196 retail stores in six states through which we sell whole bean coffee, beverages and pastries, tea, and other related items. Our stores are designed to facilitate the sale of fresh whole bean coffee and to encourage customer trial of our coffee through coffee beverages. At our bean counter, employees assist customers with questions on coffee origin and characteristics as well as home brewing. Upon order, beans are scooped and ground to the customer's specific requirements. At our beverage counter, we sell freshly-brewed coffees and coffee-based beverages which we believe promotes customer familiarity, sampling, and sales of whole-bean coffees. To ensure that our freshness standards are consistently met, it is our policy not to serve brewed coffee that is more than 30 minutes old and every espresso-based drink is made to order using freshly pulled shots of espresso and freshly steamed milk. Retail stores comprised 57.6%, 61.4% and 64.6% of net revenue for the fiscal years 2011, 2010 and 2009, respectively. See “Item 2. Properties” for further discussion about our retail stores.

Specialty

Grocery

We sell our products through a network of grocery stores, mass merchandisers and club stores, including Safeway, Stop & Shop, Ralph’s, Kroger, Publix, Whole Foods Market, Target and Walmart. To support these sales, we have developed a direct store delivery (“DSD”) selling and merchandising system. Peet's DSD route sales representatives deliver directly to their stores anywhere between one to four times per week, properly shelve the product, rotate to ensure freshness, sell and erect free-standing displays and forge store-level selling relationships. In addition, we ship directly to certain customers depending on the customer and product offering. We currently have 79 company-operated DSD route sales representatives and approximately 220 independent distributors to support grocery accounts primarily in the western U.S., eastern seaboard and other selected markets. In addition to our Peet’s brand, in 2009, we began selling Godiva brand coffees to establish a competitive position in the flavored coffee segment in grocery stores, mass merchandisers and drug stores. Grocery comprised 26.6%, 22.9% and 20.1% of net revenue for the fiscal years 2011, 2010 and 2009, respectively.

Home Delivery

Our home delivery channel offers our customers the ability to have fresh-roasted coffee and hand-packed tea shipped directly from our roastery to their doors and a wider selection of coffees and teas than are available in our retail stores or at our grocery store partners. For our most loyal home delivery customers, we provide an automatic recurring delivery coffee and tea service. We offer our home delivery services on our website, peets.com, and through our team of customer service representatives who assist customers in placing orders, as well as choosing gifts. As coffee and tea experts, the customer service team also provides in-depth coffee and tea information to our customers, guiding them through their coffee and tea explorations. Home delivery comprised 4.7%, 5.1% and 5.5% of net revenue for the fiscal years 2011, 2010 and 2009, respectively.

Foodservice and Office

In the foodservice and office business, we have a staff of sales and account managers who make sales calls to potential accounts and conduct quality audits at our existing accounts.  Additionally, we have established relationships with foodservice and office distributors to expand our account base in select markets and channels.  These distributors have their own sales and account management resources.  We have two models for servicing our foodservice accounts and distributing our products: “We Proudly Brew” (“WPB”) accounts and licensing accounts.  WPB accounts are foodservice accounts where Peet’s supplies the product, and in some cases the equipment to brew and resell our products. Licensing accounts involve the creation of a full Peet’s beverage store within another location such as an airport, grocery store or college campus.  The licensee is responsible for the build-out and management of the unit, and we provide training and operations oversight.  The office coffee channel is a distributor-based business where we sell to specialty distributors who in turn sell our products for brewing in individual offices. Foodservice and office comprised 11.1%, 10.6% and 9.8% of net revenue for the fiscal years 2011, 2010 and 2009, respectively.

Our Coffee

Coffee Beans

Coffee is an agricultural crop that undergoes quality changes depending on weather in coffee-producing countries. In addition, coffee is a trade commodity and, in general, its price can fluctuate depending on: weather patterns in coffee-producing countries; economic and political conditions affecting coffee-producing countries; foreign currency fluctuations; the ability of coffee-producing countries to agree to export quotas; and general economic conditions that make commodities more or less attractive investment options. We purchase only high-quality Arabica coffee beans, which are considered superior to beans traded in the commodity market. The Arabica beans purchased by us tend to trade on a negotiated basis at a substantial premium above commodity coffee prices, depending upon the supply and demand at the time of purchase. We procure coffee from 23 countries, with a large percentage of coffee coming from Central and South America, and over 30 different exporters, brokers and growers. Our access to high-quality Arabica beans depends on our relationships with coffee brokers, exporters and growers, with whom we have built long-term relationships to ensure a steady supply of coffee beans. We believe that, as a result of our reputation that has been built over 45 years, we have access to some of the highest-quality coffee beans from the finest estates and growing regions around the world and we are occasionally presented with opportunities to purchase unique and special coffees.

Unlike roasted coffee beans, green coffee beans are not highly perishable. We generally turn our inventory of green coffee beans two to three times per year. In 2011, due to unusually high coffee costs, we carried approximately $20 million to $50 million of green coffee beans in our inventory. In previous years the value of our inventory was considerably lower. We currently use fixed-price and not-yet-priced purchase commitments, but in the past have used and may potentially in the future use coffee futures and coffee futures options to manage coffee supply and price risk.

Our Roasting Method

Our roasting method was first developed by Alfred Peet and further honed by our talented and skilled roasting personnel. We roast by hand in small batches, and we rely on the skills and training of each roaster to maximize the flavor and potential in our beans. Our roasters undergo an extensive apprenticeship program to learn our roasting method and to gain the skills necessary to roast coffee at Peet’s and make a long-term commitment to our artisan craft.

Coffee Types and Blends

Beyond sourcing and roasting, we have developed a reputation for expert coffee blending. Our blends, such as Major Dickason’s Blend®, are well regarded by our customers for their uniqueness, consistency and special flavor characteristics. We sell approximately 28 types of coffee as regular menu items, including approximately 16 blends and 12 single origin coffees such as Colombia, Guatemala San Sebastian, Sumatra and Kenya. We also offer a line of high-end reserve coffees including JR Reserve Blend® and Kona, and we have also featured seasonal reserve coffees such as Jamaica Blue Mountain. We are active in seeking, roasting and selling unique special lot and one-time coffees. On average, we offer four to six such coffees every year, including our Anniversary Blend and Holiday Blend.

In our grocery channel, we also offer a variety of Godiva brand coffees, including several year-round and seasonal flavored coffees, such as Chocolate Truffle and Pumpkin Spice, in addition to a Breakfast Blend.

Tea, Food and Merchandise

Peet’s offers a line of hand-selected whole leaf and bagged tea. Our quality standards for tea are very high. We purchase tea directly from importers and brokers and store and pack the tea at our facility in Alameda, California. We offer a limited line of specialty food items, such as high-quality baked goods, chocolates, and other snacks. These products are carefully selected for quality and uniqueness.

Our merchandise program consists of items such as brewing equipment for coffee and tea, paper filters and brewing accessories and branded and non-branded cups, saucers, travel mugs and serveware. We do not emphasize these items, but we carry them in retail stores and offer them through home delivery as a means to reinforce our commitment to premium home-brewed coffee and tea.

Competitive Positioning

The specialty coffee category is highly competitive and fragmented among various distribution channels. Starbucks Corporation is the largest competitor in the category. The major distribution channels are coffeehouses (our retail segment) and grocery stores (part of our specialty segment). The specialty coffee category generates most of its sales from coffeehouses that currently number over 22,000 in the United States.  In addition, coffee is sold by coffee roasters like Peet’s to grocery stores, foodservice operators, offices, and direct to consumers through websites and mail order and other places where coffee is consumed or purchased for home consumption.

In the coffeehouse business, Starbucks is our primary competition, but we also compete with small single-unit independently owned coffeehouses and regional or local chains such as Coffee Bean & Tea Leaf and Tully’s.  In addition, consumers may purchase prepared coffee beverages at locations such as convenience stores, bakeries and restaurants.

Outside of the coffeehouse business, Starbucks is also our primary competitor but we also compete with Green Mountain Coffee Roasters (“GMCR”), Illy Caffé, Seattle’s Best (Starbucks), and Dunkin’ Donuts as well as numerous smaller, regional brands.  In addition, we indirectly compete with more mainstream brands as Maxwell House (Kraft) and Folgers (J.M. Smucker).  In the grocery channel, Kraft and J.M. Smucker are the largest players since Kraft distributes its own brands, while J.M. Smucker licenses and distributes the Dunkin’ Donuts brand in addition to its Folgers and Millstone brands.

Over the last several years, the coffee industry has seen two trends that could have a significant impact on the future of the industry and our performance.  The first is the “mainstreaming” of specialty coffee as consumers have been upgrading their coffee purchases to higher quality coffee.  Over the last decade, specialty coffee has grown rapidly and has driven most of the growth in the coffee category. The second trend is the emergence of coffee makers intended to brew a single cup at a time.  The single cup coffee market is still in its early stages, but is growing rapidly.  The United States single cup market is currently dominated by GMCR with its cartridge-based Keurig^® K-Cup^® brewing system. Starbucks and GMCR announced in March 2011 that Starbucks is the “exclusive, licensed super-premium coffee brand produced by GMCR for the Keurig Single-Cup brewing system.” There are also several other large, well funded participants with cartridge or pod-based systems competing in this market including Nestle (Nespresso and Dolce Gusto), Kraft (Tassimo), and Mars (Flavia). These trends could impact our future prospects positively and negatively depending on how we are positioned to compete relative to these two trends.  Currently, most, but not all, single cup cartridge- or pod-based brewing systems are proprietary and would require us to come to an agreement with the owner of the brewing system to have Peet’s-branded coffee and tea available in cartridges that work in the brewers. This could positively or negatively impact us depending on whether or not we make an agreement to participate in a proprietary single cup system and, if we do, how well that single cup system performs in the marketplace.

We believe that our customers choose among specialty coffee brands based on the total value proposition that includes quality, variety, convenience, personal taste preference, and price.  We believe that our market share in the specialty category in all channels is driven by the quality of our product, which is based on a differentiated position built on our bean selectivity, freshness standards and artisan-roasting style.  Because of the fragmented nature of the specialty coffee market, we cannot accurately estimate our market share across the whole category.

Our roasted coffee that is sold to the end consumer is priced in tiers.  Our regular menu coffees are currently priced in our retail locations within a range of $12.50 to $22.95 per pound.   Our line of high-end reserve coffee is priced between $49.90 and $79.90 per pound.  In the grocery channel, we sell our coffee in 12 ounce packages at prices established by the grocery store.  Most grocery stores sell Peet’s at a price between $7.99 and $12.99 and Godiva between $7.99 and $10.99 for a 12 ounce bag.

Intellectual Property

We regard intellectual property and other proprietary rights as important to our success. We place high value on our Peet's trade name, and we own several trademarks and service marks that have been registered with the United States Patent and Trademark Office, including Peet’s^®, Peet’s Coffee & Tea^®, peets.com^®, Peet’s Coffee^®, Peet’s Tea^®, Blend 101^®, e-Cup^®, Espresso Forte^®, Fresh Truth^®, Gaia Organic Blend^®, Garuda Blend^®, JR Reserve Blend^®, Major Dickason's Blend^®, P-Cup^®, Peetniks^®, Pride of the Port^®, Pumphrey’s Blend^®, Summer House^®, Snow Leopard^®, Tea Crafted From Experience^® and Uzuri African Blend^®. We also have registered trademarks on our stylized logo and our P-mug design. In addition, we have applications pending with the United States Patent and Trademark Office for the marks Café Domingo™, Café Solano™, Drink a Great Cup. Do a Good Thing™, Ethiopian Super Natural™, and Market Cup™.   We own registered trademarks for our name and logo in Argentina, Australia, Brazil, Canada, Chile, China, Colombia, the European Union, Hong Kong, Japan, Paraguay, Philippines, Singapore, South Korea, Taiwan and Thailand. In addition to peets.com, peetscoffee.com, and coffee.com, we own several other domain names relating to coffee, Peet’s and our roasting process.

In addition to registered and pending trademarks, we consider the packaging for our coffee beans (consisting of dark brown coloring with African-style motif and lettering with a white band running around the lower quarter of the bag) and the design of the interior of our stores (consisting of dark wood fixtures, classic lighting, granite countertops and understated color) to be strong identifiers of our brand. Although we consider our packaging and store design to be essential to our brand identity, we have not applied to register these trademarks and trade dress, and thus cannot rely on the legal protections afforded by trademark registration.

Our ability to differentiate our brand from those of our competitors depends, in part, on the strength and enforcement of our trademarks. We must constantly protect against any infringement by competitors and activity that may harm the value of our brand. If a competitor infringes on our trademark rights or a third party engages in activity that we believe adversely impacts our brand, we may have to litigate to protect our rights; in which case, we may incur significant expenses and divert significant attention from our business operations.

Information Systems

The information systems installed at Peet’s are used to manage our operations and increase the productivity of our workforce. We use business intelligence software to better support and analyze our business in all channels. We have a retail point-of-sale system that we believe increases store productivity, provides a higher level of service to our customers and maintains timely information for performance evaluation. We have an integrated labor and scheduling system in our retail stores that enhances productivity and customer service as well as an inventory management system. Our grocery route management system includes integration with a handheld device and software for ordering, invoicing customers and inventory management. And, in 2009, we completed the development and implementation of an enterprise resource planning (ERP) system.

Our website offers a variety of customer-centered features and is fully integrated with our e-commerce and internal order processing and fulfillment systems. Our multi-channel store locator assists our customers in finding our retail, licensed and grocery locations. Additionally, customers with stored value cards can check their balance as well as reload their card online. We also offer in-depth information about our history, involvement in the community and our commitment to sustainable business practices.  Our information technology and marketing employees work together to optimize our e-commerce business and deliver our digital marketing programs across all of our business channels

Employees

As of March 2, 2012, we employed a workforce of 3,642 people, approximately 811 of whom work approximately 40 hours per week and are considered full-time employees. We consider our relationship with our employees to be good. Since 1979, we have offered a comprehensive benefits package to all employees who work at least 21 hours per week and have worked at least 500 total hours for the Company. We believe that our competitive benefits package is a critical element in our effort to attract and retain our employees.

Government Regulation

Our coffee roasting operations and our retail stores are subject to various governmental laws, regulations, and licenses relating to customs, health and safety, building and land use, and environmental protection. Our roasting facility is subject to state and local air-quality and emissions regulations. If we encounter difficulties in obtaining any necessary licenses or complying with these laws and regulations, then:

We believe that we are in compliance in all material respects with all such laws and regulations and that we have obtained all material licenses that are required for the operation of our business. We are not aware of any environmental regulations that have or that we believe will have a material adverse effect on our operations.

Executive Officers of the Registrant

Set forth below is information with respect to the names, ages, positions and offices of our executive officers as of March 6, 2012.

Patrick J. O'Dea has served as Chief Executive Officer and President and as a director since May 2002. From 1997 to 2001, he was Chief Executive Officer of Archway/Mother’s Cookies and Mother’s Cake and Cookie Company. From 1995 to 1997, Mr. O’Dea was the Vice President and General Manager of the Specialty Cheese Division of Stella Foods. From 1984 to 1995, he was with Procter & Gamble, where he marketed several of the company’s snack and beverage brands.

Thomas P. Cawley has served as Chief Financial Officer since July 2003. From 2000 to 2003, he was at Gap, Inc. serving as Chief Financial Officer, Gap Brand. From 1986 to 2000, Mr. Cawley was at PepsiCo/Yum Brands most recently as Chief Financial Officer of Pizza Hut. Previous to 1986, Mr. Cawley was with The Quaker Oats Company and General Foods.

Kay L. Bogeajis has served as Vice President, Retail Operations since she joined the Company in October 2007. From January 2003 to October 2007, Ms. Bogeajis served as Vice President, Western Operations for Taco Bell Corporation, a Yum! Brands, Inc. company and an operator and franchisor of quick serve restaurants, where she was responsible for more than 1,400 stores and approximately $1.4 billion in system-wide sales. From 2001 to 2003, she was Vice President Systemwide Operations for Taco Bell. Previously, she held prominent retail operations and sales positions with Taco Bell, Frito-Lay, Inc., a PepsiCo company, and Burger King Corporation.

Shawn Conway has served as Vice President, Chief Supply Chain Officer since he joined the Company in January 2010. From 2002 to 2010, he was at SKYY Spirits, the North American subsidiary of Gruppo Campari, most recently as Senior Vice President of Operations, where he was responsible for the company’s product Supply Chain functions in the United States and Mexico.  Prior to SKYY Spirits, Mr. Conway served in numerous senior finance and operations roles including Chief Financial Officer of Gateway Learning Corporation, General Manager of New Ventures at Dreyer’s Grand Ice Cream, as well as various roles within the Clorox Company.

Item 1A. Risk Factors

You should carefully consider the risks and uncertainties described below. If any of these risks or uncertainties actually occurs, our business, financial condition and results of operations could be materially and adversely affected. The risks and uncertainties listed below, however, are not exhaustive. Other sections of this Annual Report on Form 10-K include additional factors that could materially and adversely impact our business, financial condition and results of operations. Moreover, the risks and uncertainties described in this Annual Report on Form 10-K are not the only ones facing us. We operate in a very competitive and rapidly changing environment and new factors emerge from time to time. These additional risks and uncertainties, as well as risks and uncertainties that we currently believe are immaterial, also may adversely affect our business, financial condition or results of operations.

We may not be successful in the implementation of our business strategy or our business strategy may not be successful, either of which will impede our growth and our results of operations.

Our business strategy emphasizes expansion through multiple channels of distribution. Our ability to implement this business strategy depends on our ability to:

We do not know whether we will be able to successfully implement our business strategy or whether our business strategy will be successful. Our revenue and results of operations will be adversely affected if we fail to implement our business strategy or if we divert resources to a business strategy that ultimately proves unsuccessful.

Because our business is highly dependent on a single product, specialty coffee, if the demand for specialty coffee decreases, our business could suffer.

Sales of specialty coffee constituted approximately 82% of our 2011 net revenue, and 84% of our 2010 and 2009 net revenue. Demand for specialty coffee is affected by many factors, including:

Because we are highly dependent on consumer demand for specialty coffee, a shift in consumer preferences away from specialty coffee would harm our business more than if we had more diversified product offerings. If customer demand for specialty coffee decreases, our sales would decrease accordingly.

If we fail to continue to develop and maintain our brand, our business could suffer.

We believe that maintaining and developing our brand is critical to our success and that the importance of brand recognition may increase as a result of competitors offering products similar to ours. Because the majority of our retail stores are located on the West Coast, primarily in California, our brand recognition remains largely regional. Our brand building initiative involves increasing the availability of our products in grocery stores, licensed locations and foodservice locations to increase awareness of our brand and create and maintain brand loyalty. If our brand building initiative is unsuccessful, we may never recover the expenses incurred in connection with these efforts and we may be unable to increase our future revenue or implement our business strategy. As part of our brand building initiative, we may revise our packaging or make other changes from time to time. If these changes are not accepted by customers, our business could suffer.

Our success in promoting and enhancing the Peet's brand will also depend on our ability to provide customers with high-quality products and customer service. Although we take measures to ensure that we sell only fresh roasted whole bean coffee and that our retail employees and licensed locations properly prepare our coffee beverages, we have no control over our whole bean coffee products once purchased by customers. Accordingly, customers may prepare coffee from our whole bean coffee inconsistent with our standards, store our whole bean coffee for long periods of time or resell our whole bean coffee without our consent, which in each case, potentially affects the quality of the coffee prepared from our products. If customers do not perceive our products and service to be of high quality, then our reputation and the value of our brand may be diminished and, consequently, our ability to implement our business strategy may be adversely affected. Additionally, the quality and service delivered by our licensed accounts and “We Proudly Brew” accounts may be diminished by factors beyond our control, including financial pressures, or such licensed accounts may misuse our brand and other trademarks. Any shortcoming of a licensed or “We Proudly Brew” account may be attributed by customers or investors to us, thus damaging our reputation and the value of our brand and adversely affecting our ability to implement our business strategy.

Coffee costs have been very volatile over the last two years and increases in the cost of high-quality Arabica coffee beans could impact the profitability of our business.

In the past two years, we have experienced a dramatic increase in the price volatility of Arabica coffee traded on New York Board of Trade. Since May 2010, commodity coffee prices have been extremely volatile ranging from a low of $1.32 per pound and peaking at $3.05 per pound. While we do not purchase coffee on the commodity markets, price movements in the commodity trading of Arabica coffee beans impact the prices we pay. As a result of this volatility, in 2011, the price that we paid for our coffee was 42% higher per pound than what we had paid in 2010 and the increased cost affected our profitability negatively as coffee costs as a percent of sales increased from 15% to 21%. We expect the coffee commodity market to continue to be challenging as it continues to be influenced by worldwide supply and demand, the relative strength of the dollar, and speculative trading. Coffee prices can also be affected by multiple factors in the producing countries, including weather, natural disasters, political and economic conditions, export quotas or similar factors. In order to have visibility to our costs for the future, we typically fix the price of our coffee needs for the next six to 12 months by purchasing and holding large inventories of green coffee and utilizing future fixed price purchase commitments. As of January 1, 2012, our inventory and fixed price commitments are sufficient for virtually all of our anticipated 2012 needs at a cost per pound approximately 12% higher than 2011. If we are unable to pass along these costs to our customers or find other means to offset coffee inflation, our profitability and margins could be affected. Additionally, if prices of commodity coffee fall dramatically, we will be required to fulfill our commitments for our future contracts that may result in us purchasing coffee at prices substantially above the market price which could negatively impact our competiveness in the marketplace and our profitability.

Decreases in the availability of high-quality Arabica coffee beans could impact the profitability and growth of our business.

If we are not able to purchase sufficient quantities of high-quality Arabica beans due to any of the above factors, we may not be able to fulfill the demand for our coffee, our revenue may decrease and our ability to expand our business may be negatively impacted.

Besides coffee, we face exposure to other commodity cost fluctuations, which could impair our profitability.

In addition to the increase in coffee costs discussed above, we are exposed to cost fluctuation in other commodities, including milk, natural gas, gasoline, and wheat.  In addition, an increase in the cost of fuel could indirectly lead to higher electricity costs, transportation costs and other commodity costs. Much like coffee costs, the costs of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. To the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.

A significant interruption in the operation of our roasting and distribution facility could potentially disrupt our operations.

We have only one roasting and distribution facility that roasts Peet’s coffee. A significant interruption in the operation of our roasting and distribution facility, whether as a result of a natural disaster, pandemic or other causes, could significantly impair our ability to operate our business. Since we only roast our coffee to order, we do not carry significant inventory of roasted coffee in our roasting plant. Therefore, a disruption in service in our roasting facility would impact our sales in our retail and specialty channels almost immediately. Moreover, our roasting and distribution facility and most of our stores are located near several major earthquake faults and our roastery is located directly on the bay in Alameda. The impact of a major earthquake or tsunami on our facilities, infrastructure and overall operations is difficult to predict and an earthquake or tsunami could seriously disrupt our entire business.

A major earthquake or tsunami could seriously disrupt our entire business.

Our roasting and distribution facility and several dozens of our stores are located near several major earthquake faults and near the water in the San Francisco Bay area. The impact of a major earthquake and/or tsunami in the San Francisco Bay area on our facilities, infrastructure and overall operations is difficult to predict, and an earthquake or tsunami could seriously disrupt our entire business. Our insurance may not adequately cover our losses and expenses in the event of an earthquake. As a result, a major earthquake or tsunami in the San Francisco Bay area could not only seriously disrupt our business, but may also lead to substantial losses.

The recent recession or a worsening of the United States and global economy could materially adversely affect our business.

Our revenues and performance depend significantly on consumer confidence and spending, which have deteriorated due to the recession and may remain depressed for the foreseeable future. Some of the factors that could influence the levels of consumer confidence and spending include, without limitation, continuing conditions in the residential real estate and mortgage markets, access to credit, labor and healthcare costs, increases in fuel and other energy costs, elevated unemployment levels and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and on our financial condition and results of operations.

Because our business is based primarily in California, a worsening of economic conditions, a decrease in consumer spending or a change in the competitive conditions in this market may substantially decrease our revenue and may adversely impact our ability to implement our business strategy. We expect that our California operations will continue to generate a substantial portion of our revenue.  In addition, our California retail stores provide us with means for increasing brand awareness, building customer loyalty and creating a premium specialty coffee brand.  As a result, if the current economic downturn and decrease in consumer spending in California continues or worsens, it may not only lead to a substantial decrease in revenue, but may also adversely impact our ability to market our brand, build customer loyalty, or otherwise implement our business strategy.

Competition in the specialty coffee market is intense and could affect our profits and outlook.

The specialty coffee category is highly competitive and fragmented among various distribution channels. Our major distribution channels remain coffeehouses (our retail segment) and grocery stores (part of our specialty segment), but we also (like other coffee roasters) sell to foodservice operators, direct to consumers through websites and mail order, and to offices and other places where coffee is consumed or purchased for home consumption. Increased competition, in particular in the coffeehouse and grocery store channels, could adversely affect our results of operations.

In addition, the single cup coffee market is growing rapidly. The United States single cup market is currently dominated by Green Mountain Coffee Roasters (“GMCR”) with its cartridge-based Keurig^® K-Cup^® brewing system. Starbucks and GMCR announced in March 2011 that Starbucks is the “exclusive, licensed super-premium coffee brand produced by GMCR for the Keurig Single-Cup brewing system.” There are also several other large, well funded participants with cartridge or pod-based systems competing in this market including Nestle (Nespresso and Dolce Gusto), Kraft (Tassimo), and Mars (Flavia). Currently, most, but not all, single cup cartridge- or pod-based brewing systems are proprietary and could require us to come to an agreement with the owner of the brewing system to have Peet’s-branded coffee and tea available in cartridges that work in the brewers. If the single cup cartridge or pod-based market of proprietary brewing systems continues to grow rapidly at the expense of the non-proprietary single cup brewing methods or existing drip brewing methods and we do not participate in that market segment, our revenue and profit margins could be negatively impacted in the future.

Many of Peet’s competitors, including Starbucks, GMCR, J.M. Smucker, Nestle and Kraft, are much larger and have greater financial resources than we do.  As a result, these competitors may have greater flexibility and resources to react to changes in the market. For instance, we were unable to purchase Diedrich Coffee in 2009, because GMCR, the eventual purchaser of Diedrich Coffee, had substantially greater financial resources than Peet’s and was able to pay a substantially higher purchase price for Diedrich Coffee. In addition, our larger competitors have greater resources to promote heavily, reduce prices, maintain prices in the face of cost pressures, or buy shelf space. Our ability to respond to these actions may be inhibited by cost increases or other financial pressures, which may reduce our market share if sustained; alternatively, our efforts to respond to such actions may negatively impact our profit margins. Our competitors may continue to use their size and financial resources to impair our ability to execute our business strategy and reduce our profit margins in the future.

Complaints or claims by current, former or prospective employees or governmental agencies could adversely affect us.

We are subject to a variety of laws and regulations which govern such matters as minimum wages, overtime and other working conditions, meal and rest periods, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated, by federal, state and local governmental authorities that govern these and other employment matters. We have been, and in the future may be, the subject of complaints or litigation from current, former or prospective employees or governmental agencies. In addition, successful complaints against our competitors may spur similar lawsuits against us. For instance, in 2003, two lawsuits (which have since been settled) were filed against us alleging misclassification of employment position and sought damages, restitution, reclassification and attorneys’ fees and costs. In 2008, a lawsuit (which has since been settled) was filed alleging that store managers based in California were not paid overtime wages, were not provided meal or rest periods, were not provided accurate wage statements and were not reimbursed for business expenses. In addition, on February 23, 2010, a lawsuit (for which a settlement has been approved) was filed by non-exempt employees on their own behalf and on behalf of employees similarly situated alleging claims for unpaid overtime, unpaid meal and rest period premiums, unpaid business expenses, unpaid minimum wages, untimely wages paid at time of termination, untimely payment of wages, failure to pay vacation wages and non-compliant wage statements. These types of claims and litigation involving current, former or prospective employees could divert our management’s time and attention from our business operations and might result in substantial costs of defense, settlement or other disposition, which could have a material adverse effect on our results of operations in one or more fiscal periods.

Claims and litigation could have a material adverse effect on us.

In addition to employment-related claims, we may be subject to various other claims and litigation. For example, in 2010 and 2011, we, and a number of companies that sell “ready to drink” coffee and coffee sold at retail and brewed and consumed elsewhere were sued for not providing “clear and reasonable warnings” in accordance with California Health and Safety Code section 25249.6 (“Proposition 65”) before allegedly exposing individuals in California to acrylamide. Peet’s remains subject to this ongoing Proposition 65 litigation as well as other litigation (including as described under Item 3. “Legal Proceedings”) and could in the future become subject to additional claims and litigation, which could involve, for example, securities law claims, commercial disputes, public health matters and disputes relating to intellectual property. Lawsuits could divert management’s time and attention from day-to-day operations, result in significant legal expenses, and result in outcomes that have a material adverse effect on our business as well as our financial condition and results of operations.

Labor conditions in the grocery business could negatively impact our grocery business.

There have been grocery strikes in the past that have negatively impacted our grocery business and it is possible that future grocery strikes in places where we have large distribution may adversely impact our grocery business.

Government mandatory healthcare requirements could adversely affect our profits.

The Company offers healthcare benefits to all employees who work at least 21 hours a week and meet service eligibility requirements. In the past, some states, including California, have proposed legislation mandating that employers pay healthcare premiums into a state run fund for all employees immediately upon hiring or pay a penalty for failing to do so. If legislation similar to this were to be enacted in California, or in the other states in which we do business, it could have an adverse effect on the Company’s results of operations. In addition, comprehensive federal health care legislation (the Patient Protection and Affordable Care Act and the Health Care and Education Affordability Reconciliation Act of 2010) was passed and signed into law in March, 2010.  Due to the breadth and complexity of this legislation, the phased-in nature of the implementation, and the lack of implementing regulations, it is difficult to predict the financial and operational impacts this legislation will have on us. Our expenses may significantly increase over the long-term as a result of this legislation.

Because we rely heavily on common carriers to ship our coffee on a daily basis, any disruption in their services or increase in shipping costs could adversely affect our business.

We rely on a number of common carriers to deliver coffee to our customers, retail stores, and direct store delivery representatives. We consider roasted coffee a perishable product and we rely on these common carriers to deliver fresh roasted coffee on a daily basis. We have no control over these common carriers and the services provided by them may be interrupted as a result of labor shortages, contract disputes or other factors. If we experience an interruption in these services, we may be unable to ship our coffee in a timely manner. A delay in shipping could:

Any significant increase in shipping costs could lower our profit margins or force us to raise prices, which could cause our revenue and profits to suffer.

We depend on the expertise of key personnel. If these individuals leave or change their role within our Company without effective replacements, our operations may suffer.

The success of our business is dependent to a large degree on our management and our coffee roasters and purchasers. If members of our management leave without effective replacements, our ability to implement our business strategy could be impaired. If we lost the services of our coffee roasters and purchasers, our ability to source and purchase a sufficient supply of high-quality coffee beans and roast coffee beans consistent with our quality standards could suffer. In either case, our business and operations could be adversely affected.

We may not be able to hire or retain additional management and other personnel and our recruiting and training costs may increase as a result of turnover, both of which may increase our costs and reduce our profits and may adversely impact our ability to implement our business strategy.

The success of our business depends upon our ability to attract and retain highly motivated, well-qualified management and other personnel, including technical personnel and retail employees. We face significant competition in the recruitment of qualified employees. Our ability to execute our business strategy may suffer if:

Our roasting methods are not proprietary, so competitors may be able to duplicate them, which could harm our competitive position.

We consider our roasting methods essential to the flavor and richness of our roasted whole bean coffee and, therefore, essential to our brand. Because we do not hold any patents for our roasting methods, it may be difficult for us to prevent competitors from copying our roasting methods. If our competitors copy our roasting methods, the value of our brand may be diminished, and we may lose customers to our competitors. In addition, competitors may be able to develop roasting methods that are more advanced than our roasting methods, which may also harm our competitive position.

Adverse public or medical opinion about caffeine may harm our business.

Our specialty coffee contains significant amounts of caffeine and other active compounds, the health effects of some of which are not fully understood. A number of research studies conclude or suggest that excessive consumption of caffeine may lead to increased heart rate, nausea and vomiting, restlessness and anxiety, depression, headaches, tremors, sleeplessness and other adverse health effects. An unfavorable report on the health effects of caffeine or other compounds present in coffee could significantly reduce the demand for coffee, which could harm our business and reduce our sales and profits. Also, we could become subject to litigation relating to the existence of such compounds in our coffee (in addition to the current Proposition 65 litigation); any such litigation could be costly and could divert management attention. 

Adverse publicity regarding product quality or food and beverage safety, whether or not accurate, may harm our business.

                We may be the subject of complaints or litigation from customers alleging beverage and food-related illnesses, injuries suffered on the premises or other quality, health or operational concerns.  Adverse publicity resulting from such allegations (or similar allegations affecting a licensed or “We Proudly Brew” account) may materially adversely affect us, regardless of whether such allegations are true or whether we (or they) are ultimately held liable.  In addition, any litigation relating to such allegations could be costly and could divert management attention.

New laws and regulations or failure to comply with applicable laws and regulations could harm our business and results of operations.

               Our coffee roasting operations and our retail stores are subject to various governmental laws, regulations and licenses relating to customs, health and safety, building and land use, environmental protection and other matters. Additionally, our company is subject to a variety of accounting and reporting requirements as well as to various governmental laws and regulations relating to privacy, taxation and other matters. The complexity of the regulatory environment in which we operate as well as the cost of compliance continue to increase. Failure to comply with the various laws, regulations and requirements applicable to us may damage our reputation, result in civil or criminal liability, and adversely affect our business and results of operations. In addition, new laws or regulations may adversely impact our operating costs. For example, final rules were recently issued by the Federal Reserve Board with respect to Section 1075 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, typically referred to as the Durbin Amendment. These rules defined a cap for debit card interchange fees. This cap, which is significantly higher than what we typically paid during most of fiscal 2011given our average transaction size in retail, has become the default rate for certain transactions and therefore has negatively impacted us (and we expect it to continue to do so.) Future laws or regulations (or the cost of complying with such laws, regulations or requirements) could also adversely affect our business and results of operations.

Failure to meet market expectations for our financial or strategic performance will likely adversely affect the market price and volatility of our stock.

                During the past two years, our common stock has traded at a low of $31.82 and a high of $64.00 per share, and it closed at $62.68 on December 30, 2011. We provide public guidance on our expected results of operations for future periods. This guidance is comprised of forward-looking statements subject to risks and uncertainties, including the risks and uncertainties described in this annual report on Form 10-K and in our other public filings and public statements, and is based necessarily on assumptions we make at the time we provide such guidance. Our guidance may not always be accurate. If, in the future, our results of operations for a particular period do not meet our guidance or if we reduce our guidance for future periods, the market price of our common stock could decline significantly and/or the volatility in the market price of our common stock could increase. Our common stock could be similarly adversely affected if, in the future, our results of operations or our guidance does not meet the expectations of investment analysts or the market (particularly with respect to operating margins, earnings per share, net revenue, cash flows or strategic initiatives).

We rely heavily on information technology in our operations, and any material failure, inadequacy, interruption or security failure of that technology could harm our ability to effectively operate our business and adversely impact our results of operations.

                We rely heavily on information technology systems across our operations, including for supply chain support, point-of-sale processing in our stores, gift cards, online business, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems (particularly those involving payment or financial data), or a breach in security of some of these systems could negatively impact our sales, increase our costs (whether as a result of reduced efficiency, remediation costs or otherwise) and adversely affect our results of operations. Security breaches of our employees’ or customers’ private data could also adversely impact our reputation and could result in litigation against us or the imposition of penalties.

Our costs could be negatively affected by an unpredictable workers' compensation environment.

The majority of our employees are located in California, which has experienced higher workers compensation costs and rates than other states. For the policy years beginning March 2002 through February 2008 our workers' compensation insurance program was a modified self-insured program with a high deductible and an overall program ceiling to limit exposure. For those years, we have established a reserve of $0.4 million. However, the settlement costs for the remaining claims for those years could exceed our reserves. For the policy years beginning March 1, 2008, we have purchased a guaranteed cost policy. As a result, for 2008 and subsequent policy years, we remain exposed to premium fluctuations due to California’s unpredictable workers compensation environment and rising costs and our historical worker compensation experience. Settlement costs in excess of our reserves (for claims before March 2008) or an increase in insurance premiums could impair our profitability.

Item 1B. Unresolved Staff Comments

Not Applicable.

Item 2. Properties

Peet’s headquarters are located in Emeryville, California. The lease for our main office space devoted to general corporate and business channel overhead and a call center is approximately 60,000 square feet and extends to October 2015 with two five-year extension options. In addition, we have a lease for a second office and warehouse space totaling approximately 8,000 square feet through April 30, 2013.

In December 2006, we purchased approximately 460,000 square feet of land and a 138,000 square foot building with related site improvements in Alameda, California, for the purpose of operating a new roasting and distribution facility. The final purchase price of the facility and the land was $18.6 million. We transitioned our operations to this facility and were effectively at full production capability in May 2007.

In 2011, we opened 4 new stores. Our retail locations are all company-owned and operated in leased facilities. Our stores are typically located in urban neighborhoods, suburban shopping centers (usually consisting of grocery, specialty and service stores) and on high-traffic streets.

The following table lists the number of our retail locations as of January 1, 2012:

Item 3. Legal Proceedings

The Company is party to the significant legal proceedings described below.

On February 23, 2010, a complaint was filed in Orange County Superior Court by two former employees, on behalf of themselves and all other non-exempt employees similarly situated in the state of California (the “class”) naming us as a defendant. One of the named plaintiffs was removed by an amended complaint and the remaining named plaintiff alleges claims for unpaid overtime, unpaid meal and rest period premiums, unpaid business expenses, unpaid minimum wages, untimely wages paid at time of termination, untimely payment of wages, failure to pay vacation wages, violation of California Business & Professions Code section 17200 and non-compliant wage statements and seeks injunctive relief, restitution, monetary damages, penalties under the California Labor Code Private Attorneys General Act, costs and attorneys’ fees, penalties, and prejudgment interest.  On September 14, 2011, we reached a tentative settlement pursuant to which we deny any liability but agree to maximum payment to class participants of $2,875,000, including plaintiff’s attorney’s fees. On December 19, 2011, the California Superior Court granted preliminary approval of the settlement terms. These costs, in addition to the our attorney’s fees, are reflected as litigation-related expenses in the accompanying consolidated statements of income.

On August 7, 2010, the Council for Education and Research on Toxics (“CERT”), filed an enforcement action under California Health and Safety Code section 25249.6 (“Proposition 65”) against a number of companies, including us, for  not providing "clear and reasonable warnings" before allegedly exposing individuals in California to acrylamide in “ready to drink” coffee.   On May 9, 2011, CERT sued more than 40 companies that sell beans, grounds and other "coffee" products in California, including us, for not providing "clear and reasonable warnings" before allegedly exposing individuals in California to acrylamide in such coffee products.  The cases have been related and are pending in Los Angeles County Superior Court.  We have joined with the other defendants and are vigorously defending these actions. As these matters are at a very early stage, at this time, we are not able to predict the probability of the outcome or estimate of loss, if any, related to these matters. 

On May 17, 2011, Aegis Retail Group, LLC and various affiliates (“Aegis”) filed a lawsuit against us in the Supreme Court of the State of New York, County of New York claiming that we breached an alleged agreement to permit Aegis to open licensed Peet's Coffee & Tea locations and participate in our “We Proudly Brew” program in the New York metropolitan area.  We are vigorously defending against this claim. At this time, we are not able to predict the probability of the outcome or estimate of loss, if any, related to this matter. On May 19, 2011, Aegis filed a motion for preliminary injunction that sought to compel us to reinstate and continue Aegis’s participation in our “We Proudly Brew” program at two locations and to continue to negotiate licenses for two locations. On December 21, 2011 the court denied Aegis’s request for preliminary injunction.

The Company is involved in various other litigation and governmental proceedings, not described above, that have arisen in the normal course of business. While it is not possible to determine with certainty the ultimate outcome or the duration of any such litigation or governmental proceedings, the Company believes, based on current knowledge and the advice of counsel, that such litigation and proceedings will not have a material impact on the Company’s consolidated financial position or results of operations.

Item 4. Mine Safety Disclosures

Not applicable.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for the Registrant’s Stock

The Company’s common stock is traded on the Nasdaq National Market under the symbol ‘‘PEET’’. The following table sets forth, for the periods indicated, the high and low closing prices for our common stock as reported on the Nasdaq National Market for each quarter during the last two fiscal years.

As of March 2, 2012, there were approximately 364 registered holders of record of the Company’s common stock. On March 2, 2012, the last sale price reported on the Nasdaq National Market for our common stock was $64.60 per share.

Dividend Policy

We have not declared or paid any dividends on our capital stock since becoming a public company. We expect to retain any future earnings to fund the development and expansion of our business. Therefore, we do not anticipate paying cash dividends on our common stock in the foreseeable future.

Issuer Purchases of Equity Securities

On September 2, 2010, the Board of Directors authorized the Company to purchase up to one million shares of the Company’s common stock. During the year ended January 1, 2012, the Company purchased and retired 805,451 shares of common stock, at an average price of $44.20, in accordance with this stock purchase program. As of January 1, 2012, no shares remained available for purchase under this stock purchase program.

On May 27, 2011, the Board of Directors authorized the Company to purchase up to one million additional shares of the Company’s common stock. During the year ended January 1, 2012, the Company purchased 274,834 shares of common stock, at an average price of $57.06, in accordance with this stock purchase program. From January 2, 2012 through March 2, 2012, there were no shares purchased in accordance with this program. As of March 2, 2012 and January 1, 2012, 725,166 shares remained available for purchase under this stock purchase program. Purchases under this stock purchase program may be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market.

No purchases were made by us or any “affiliated purchaser” as defined in Rule 10b-18(a)(3) of the Exchange Act of the Company’s common stock during the fourth fiscal quarter of 2011.

Performance Graph*

The following graph depicts the Company’s total return to shareholders from December 31, 2006 through January 1, 2012, relative to the performance of the NASDAQ Composite Index, and the Standard & Poor’s SmallCap 600 Consumer Goods Sector, Packaged Foods & Meats Industry. All indices shown in the graph have been reset to a base of 100 as of December 31, 2006, assume an investment of $100 on that date and the reinvestment of dividends paid since that date, calculated on a monthly basis. Since becoming a public company, the Company has not paid cash dividends on its common stock. The points represent index levels based on the last trading day of the Company’s fiscal year. The chart set forth below was prepared by Research Data Group, Inc., which holds a license to provide the indices used herein. The stock price performance shown in the graph is not necessarily indicative of future price performance.

*This section is not “soliciting material”, is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Securities Exchange Act made before or after the date hereof and irrespective of any general incorporation language in any such filing.

Item 6. Selected Consolidated Financial Data

The table below shows selected consolidated financial data for our last five fiscal years. Our fiscal year is based on a 52 or 53-week year and ends on the Sunday closest to the last day in December.

The following selected consolidated financial data is qualified by reference to, and should be read in conjunction with, our consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report. Our historical results are not necessarily indicative of results to be expected in any future period.

Selected Consolidated Financial Data

(in thousands, except per share data)

See discussion of transaction-related expenses/(income), litigation-related expenses, and gain on sale of marketable securities in 2011, 2010 and 2009 in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The following discussion and analysis contains a number of forward-looking statements, including, without limitation, statements about our expected results of operations in 2012 (including the performance or other factors expected to drive those results), the coffee industry, the expected growth of specialty coffee, and related trends. All forward-looking statements are based on our current expectations and could be affected by the uncertainties and risks described throughout this report, particularly in “Item 1A. Risk Factors.” Our actual results may differ materially. Please see “Cautionary Statement Regarding Forward Looking Statements” at the beginning of this report. The fiscal year ended January 1, 2012 (fiscal 2011) included 52 weeks, the fiscal year ended January 2, 2011 (fiscal 2010) included 52 weeks, and the fiscal year ended January 3, 2010 (fiscal 2009) included 53 weeks.

Company Overview and Industry Outlook

Peet’s is a specialty coffee roaster and marketer of fresh-roasted whole bean coffee and tea. We sell our Peet’s brand coffee and tea through multiple channels of distribution, including grocery stores, home delivery, office, restaurant and foodservice accounts and, in six states, Company-owned and -operated stores. In addition, we sell Godiva^® Chocolatier brand coffees in our grocery channel. Founded in Berkeley, California in 1966, Peet's has established a loyal customer base with strong brand awareness in California. 

We expect the specialty coffee industry, fueled by continued consumer interest in high-quality coffee and related products, to continue to grow. We believe that growth opportunities exist in all of our distribution channels and that our specialty segment can expand to geographies where we do not have a retail presence. In retail, we expect to continue to open new retail stores in strategic west coast locations that meet our demographic profile. In grocery, we expect to continue to expand into new markets in addition to the western U.S., eastern seaboard and other selected markets, although the full extent of our penetration will depend upon the growth of the specialty coffee category in those markets. We will continue to work with distributors and companies to expand our presence in the foodservice and office environment.

In the past two years, we have experienced a dramatic increase in the price volatility of Arabica coffee traded on New York Board of Trade. Since May 2010, commodity coffee prices have been extremely volatile ranging from a low of $1.32 per pound and peaking at $3.05 per pound. While we do not purchase coffee on the commodity markets, price movements in the commodity trading of Arabica coffee beans impact the prices we pay. As a result of this volatility, in 2011, the price that we paid for our coffee was 42% higher per pound than what we had paid in 2010 and that increased cost negatively affected our profitability as coffee costs as a percent of sales increased from 15% to 21%. We expect the coffee commodity market to continue to be challenging as the market continues to be influenced by worldwide supply and demand, the relative strength of the dollar, speculative trading and weather. In order to have visibility to our costs for the future, we typically fix the price of our coffee needs for the next six to 12 months by purchasing and holding large inventories of green coffee and utilizing future fixed price purchase commitments. As of January 1, 2012, our inventory and fixed price commitments are sufficient for virtually all of our anticipated 2012 needs at a cost approximately 12% higher per pound than 2011 (with year-over-year increases expected to be higher earlier in the year than later).

For 2011, in addition to benefiting from price increases, we also benefited from several cost reduction and growth initiatives that offset most of these coffee cost increases.

We have historically raised prices in each of our channels to offset the higher costs and we did increase prices in each channel in 2010 or 2011.  If we are unable to pass along these costs to our customers or find other means to offset coffee or other inflation, our profitability and margins will be negatively affected. Additionally, if prices of commodity coffee fall dramatically, we will be required to fulfill our commitments for our future contracts that may result in us purchasing coffee at prices substantially above the market price which could negatively impact our competiveness in the marketplace and our profitability. We will continue to monitor these markets and take actions we feel are appropriate to minimize the impact on us in the short and long-term.

During fiscal 2011, we incurred expense of approximately $3.3 million (including anticipated settlement and legal costs) in connection with a class action lawsuit that had been filed against us in the first quarter of fiscal 2010. See “Legal Proceedings” included elsewhere in this report for additional information regarding this class action lawsuit. During fiscal 2010, we incurred approximately $1.0 million of transaction-related expenses as discussed further below.

Business Segments

Our coffee and related items are sold through multiple channels of distribution that provide broad market exposure to potential purchasers of fresh roasted whole bean coffee. We are indifferent as to where consumers purchase our coffees and teas, and believe that our specialty and retail segments are synergistic. However, we also recognize that the economics and distribution models of our retail stores and other distribution channels are different enough that we have chosen to report them as separate segments under ASC 280, “Segment Reporting.” Therefore, we currently have two reportable segments, consisting of:

Business Categories

In addition to our reportable segments, we measure our business by monitoring the volume and revenue growth of two distinct business categories:

We operate our stores and record revenue through these two categories and we believe these business categories are useful in understanding our results of operations for the periods presented. Our stores are primarily designed to facilitate the sale of fresh whole bean coffee and hand-crafted coffee beverages. The format of our stores replicates that of a specialty grocer. Beans are freshly scooped from bins, weighed on counter top scales and hand packed into branded bags. In addition, our stores are also designed to encourage customer trial of our coffee through coffee beverages. Each store has a beverage bar that is dedicated to the sale of prepared beverages and artisan baked goods.

Results of Operations

The following discussion on results of operations should be read in conjunction with “Item 6. Selected Consolidated Financial Data,” the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this report.

Our fiscal year is based on a 52 or 53-week year. The fiscal year ends on the Sunday closest to the last day of December. 2011 was a 52-week year, 2010 was a 52-week year, and 2009 was a 53-week year. Percent data may not sum due to rounding.

2011 (52 weeks) Compared with 2010 (52 weeks)

Net revenue

Net revenue for 2011 increased as a result of our continued expansion of our retail and specialty segments. The table below sets forth net revenues for 2011 and 2010 by business segment as well as business category.

In the retail segment, net revenue increased primarily as a result of growth in existing stores’ beverage and pastries sales and, to a lesser extent, increased whole bean coffee and related sales. The beverage and pastries sales increase was due to a 6% increase in average transaction. The increase in whole bean coffee sales was due primarily to a 3% increase in average transaction, partially offset by continuing cannibalization of bean sales in retail stores by sales of Peet’s coffee in grocery stores. We opened four stores in 2011.

In the specialty segment, the increase in net revenue was driven by a 15% volume increase and an 8% increase in average price. The growth in net revenue in grocery was due primarily to increased volume in existing and new accounts as well as an increase in average price. The growth in net revenue in foodservice and office was due primarily to new accounts as well as an increase in average price. The growth in net revenue in home delivery was due to an increase in average price offset by a volume decline due to cannibalization by our grocery business.

We expect continued revenue growth in 2012 from continued expansion of our grocery and foodservice businesses and existing retail stores, in addition to the expected opening of up to four new stores, and continued benefit of the pricing actions taken in 2011.

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales increased from 46.4% in 2010 to 50.1% in 2011. The increase was due primarily to higher coffee and, to a lesser extent, higher milk costs and a shift in revenue mix towards the specialty channel where we have lower gross margins than our retail business, partially offset by the impact of price increases and lower shipping expenses.

In the retail segment, cost of sales and related occupancy expenses as a percent of net revenue increased 1.7% as the impact of higher coffee costs and, to a lesser extent, milk costs was partially offset by the impact of price increases.

In the specialty segment, cost of sales and related occupancy expenses as a percent of net revenue increased 5.7% as the impact of higher coffee costs outweighed the impact of price increases and lower shipping expenses.

We expect cost of sales and related occupancy expenses as a percent of net revenue in 2012 to be slightly higher due primarily to increased coffee costs, largely offset by pricing and continued benefit of lower shipping expenses resulting from the initiative that began in the second quarter of 2011.

Operating expenses

Operating expenses consist of both retail store and specialty operating costs, such as employee labor and benefits, independent distributor commissions, repairs and maintenance, supplies, training, travel and banking and card processing fees. Operating expenses as a percent of net revenue for 2011 decreased 2.4% to 30.4%. The decrease was due to a favorable mix shift towards the specialty business (where we have higher operating margins than our retail business), the impact of price increases across all channels, leveraging of overhead expenses, and cost efficiencies in both our retail stores and our direct store delivery system.

In the retail segment, operating expenses as a percent of net revenue decreased 2.0% primarily due to labor efficiencies in retail stores, the impact of price increases, and lower maintenance and supplies expenses, partially offset by impairment losses on underperforming stores.

In the specialty segment, operating expenses as a percent of net revenue decreased 1.2% due primarily to the impact of price increases, cost efficiencies in our direct store delivery system and leverage of overhead expenses, partially offset by higher legal expenses related primarily to the Aegis litigation.

We expect operating expenses as a percent of net revenue in 2012 to continue to improve due to similar factors, but to a lesser degree than in 2011. In addition, we expect higher debit card fees in 2012.

Transaction-related expenses/(income)

There were no transaction-related expenses/(income) in 2011. Transaction-related expenses/(income) in 2010 reflect legal and related expenses of $1.0 million we incurred by responding to the subpoena we received from the Federal Trade Commission (FTC) in connection with the FTC's anti-trust review of the acquisition of Diedrich Coffee by GMCR.

Litigation-related expenses

Litigation-related expenses in 2011 reflect $3.3 million of expenses incurred or accrued in connection with a class action lawsuit filed against the Company in the first quarter of 2010. In 2010, litigation-related expenses consist of $59,000 of expenses related to the class action lawsuit filed in the first quarter of 2010, offset by a $93,000 expense reduction based on the difference between the previously recorded liability and the final settlement payment from a class action lawsuit filed against the Company in the third quarter of 2008.

As discussed in Item 3.  “Legal Proceedings”, we currently are subject to two lawsuits related to Proposition 65 and a lawsuit alleging breach of contract.   At this time, it is not feasible to predict the outcome of or a range of loss, should a loss occur, from these proceedings or the expenses we will incur in 2012 to defend these proceedings.

General and administrative expenses

General and administrative expenses in 2011 were $25.9 million, or 7.0% of net revenue, compared to $25.0 million, or 7.5% of net revenue in 2010. As a percent of net revenue, expenses improved due to leverage of costs on higher sales, partially offset by increases in marketing expenses.

Depreciation and amortization expenses

Depreciation and amortization expenses decreased slightly over prior year as recent retail and infrastructure investments are offset by assets becoming fully depreciated.

Interest income, net

We invest in U.S. government, agency, municipal and equity securities. Interest income includes interest income and gains or losses from the sale of these instruments. We earned $8,000 in interest income in 2011 and 2010. The Company does not have exposure in its investment portfolio to subprime mortgages or auction rate securities.

Income tax provision

The effective income tax rate for 2011 was 35.6% compared to 36.4% in 2010. Our effective rate decreased 0.8%, attributable largely to the change in California law in the way income is apportioned to California, lowering our state effective rate. We anticipate our tax rate in 2012 to be higher than 2011.

2010 (52 weeks) Compared with 2009 (53 weeks)

Net revenue

Net revenue for 2010 increased as a result of continued expansion of our retail and specialty segments offset by the impact of an extra week in fiscal year 2009. The table below sets forth net revenues for 2010 and 2009 on an actual and on a non-GAAP 52-week basis by business segment as well as business category.

*The 2009 52-week revenue numbers are non-GAAP financial measures, which we present in order to give the investor the ability to compare our 2011, 2010 and 2009 revenues on a comparable 52-week basis.  Management compares revenues on similar 52-week basis to assess revenue growth on a year-over-year basis. Management considers the 53^rd week to be the last week of fiscal 2009.

In the retail segment, net revenue increased primarily as a result of increased sales from stores operating for over one year. We opened two new stores in 2010 and eight new stores in 2009, and closed two and four stores, respectively. The increase in beverage and pastry sales was primarily related to sales from stores operating over one year and by new product introductions facilitated by our new reach-in coolers, which we installed in a substantial number of our stores in 2010. The slower growth on a comparable 52-week basis in whole bean and related products was primarily due to continuing cannibalization of bean sales in retail stores as we increased the availability and sales levels of Peet’s coffee in grocery stores.

The growth in net revenue in grocery was due to increased share in existing markets and to a lesser extent, to new grocery stores added during the year and the introduction of Godiva coffee in the fourth quarter of 2009. Foodservice and office net revenue increased over the prior year primarily due to increased office coffee distribution, the 10 new licensed locations opened during the year and 71 additional “We Proudly Brew” accounts that serve Peet’s coffee in their own branded locations. Net revenue in the home delivery channel did not grow due to cannibalization from our grocery business.

Cost of sales and related occupancy expenses

Cost of sales and related occupancy expenses consist of product costs, including manufacturing costs, rent and other occupancy costs. As a percent of net revenue, cost of sales increased from 45.9% in 2009 to 46.4% in 2010. The increase from 2009 was primarily due to higher commodity costs and a shift in revenue mix towards the grocery channel where both Peet’s and Godiva brands have lower gross margins than our retail business, partially offset by the impact of a price increase in retail in the fourth quarter of 2010 and lower operating costs at the roasting facility as a percentage of sales.

Operating expenses

Operating expenses consist of both retail store and specialty operating costs, such as employee labor and benefits, independent distributor commissions, repairs and maintenance, supplies, training, travel and banking and card processing fees. Operating expenses as a percent of net revenue for 2010 decreased 1.5% to 32.8%. The decrease was primarily due to the favorable shift in revenue mix towards the grocery and other specialty channels, which have lower operating expenses than our retail business, to the store closure costs in fiscal 2009, and due to leverage of retail overhead costs.

Transaction-related expenses/(income)

Transaction-related expenses/(income) in 2010 reflect legal and related expenses of $1.0 million we incurred by responding to the subpoena we received from the Federal Trade Commission (FTC) in connection with the FTC's anti-trust review of the acquisition of Diedrich Coffee by GMCR. In 2009, the net income consists of an $8.5 million break-up fee received for the termination of a definitive agreement for Peet’s to acquire Diedrich Coffee, net of $4.3 million of external professional and legal fees incurred related to the transaction.

Litigation-related expenses

In 2010, litigation-related expenses consist of $59,000 of expenses related to the class action lawsuit filed in the first quarter of 2010, offset by a $93,000 expense reduction based on the difference between the previously recorded liability and the final settlement payment from a class action lawsuit filed against the Company in the third quarter of 2008.

General and administrative expenses

General and administrative expenses in 2010 were $25.1 million, or 7.5% of net revenue, compared to $24.5 million, or 7.9% of net revenue in 2009. As a percent of net revenue, expenses improved due to leverage of costs on higher sales, partially offset by increases in payroll related expenses.

Depreciation and amortization expenses

Depreciation and amortization expenses increased slightly over 2009 as recent retail and infrastructure investments are beginning to be offset by assets becoming fully depreciated.

Interest income, net

We invest in U.S. government, agency, municipal and equity securities. Interest income includes interest income and gains or losses from the sale of these instruments. We earned $8,000 in interest income in 2010, compared to $112,000 in 2009, due primarily to lower interest rates on investments. The Company does not have exposure in its investment portfolio to subprime mortgages or auction rate securities.

Gain on sale of marketable securities

During 2009, the Company recorded a gain on the sale of stock of $7.3 million for stock of Diedrich Coffee that we acquired and sold within the year. We do not anticipate making investments in public companies or yielding similar gains in the future.

Income tax provision

The effective income tax rate for 2010 was 36.4% compared to 37.5% in 2009. Our effective rate decreased 1.1%, primarily due to the statutory increase in the domestic production deduction from 6% to 9% of taxable income in 2010.

Liquidity and Capital Resources

At January 1, 2012, we had $30.8 million in cash and cash equivalents. Working capital was $94.5 million as of January 1, 2012 compared to $81.6 million at January 2, 2011.

Net cash provided by operations was $12.4 million in 2011 compared to $24.8 million in 2010. Operating cash flows were lower than the prior year period primarily due to increased green coffee inventories and other changes in working capital. The increase in green coffee inventory was primarily due to significantly higher coffee costs per pound purchased in the current year as well as an increase in total pounds. In 2012, we expect cash flows from operating activities to increase as inventory balances remain more consistent with 2011.

Net cash used in investing activities was $10.9 million in 2011.  Investing activities primarily relate to purchases of property and equipment, and sales and maturities of marketable securities.  During 2011, purchases of marketable securities totaled $10.6 million and proceeds from the sale of marketable securities were $9.8 million. Cash paid for property and equipment totaling $10.8 million included:

Net cash used in financing activities was $15.4 million in 2011, consisting of $51.3 million for the purchase of our common stock, offset by proceeds and the excess tax benefit from stock option exercises.

Our 2012 capital expenditures are expected to be approximately $11.0 million. Approximately $5.0 million is expected to be used for existing store improvements, new stores, and remodels. Approximately $4.0 million is expected to be used for information technology software and hardware to support our growth. Approximately $1.2 million is expected to be used for equipment and machinery to improve effectiveness and increase capacity at our roasting facility. The balance is expected to be used for equipment for the foodservice and grocery channels. We expect to finance these capital expenditures with our cash and marketable securities and with operating cash flows.

The following table summarizes the Company’s contractual obligations and the timing and effect that such commitments are expected to have on the Company’s liquidity and capital requirements in future periods as of January 1, 2012: 

The Company has excluded from the table above uncertain tax liabilities as defined in ASC 740, “Unrecognized Tax Benefits,” due to the uncertainty of the period of payment. As of January 1, 2012, the Company has a $222,000 liability for uncertain tax positions (see Note 6. “Income Taxes” in the “Notes to Consolidated Financial Statements” included elsewhere in this report).

For the next twelve months, we expect our cash flows from operations and cash and marketable securities to be sufficient for our operating and capital requirements, our existing share purchase program and our contractual obligations as they come due. The Company also has $50 million available through a credit agreement entered into on December 21, 2010 with Wells Fargo Bank, National Association, the proceeds of which may be used for general corporate purposes, including funding working capital, capital expenditures, share repurchases and other needs. The line of credit has a maturity date of December 1, 2013. The Company’s obligations under the line of credit are unconditionally guaranteed by Peet’s Operating Company, Inc. in the principal amount up to $50 million.

The credit agreement contains customary affirmative and negative covenants. The credit agreement also includes financial covenants that require the Company to maintain a specified leverage ratio and a minimum amount of net income. The credit agreement includes customary events of default that permit the Bank to accelerate the Company’s outstanding obligations, including nonpayment of principal, interest, fees or other amounts, violation of covenants, failure to make any payments when due with respect to certain other debt or certain failures to comply with the terms of such other debt, entry of certain judgments, inaccuracy of representations and warranties, occurrence of any event or condition that has a material adverse effect, and upon the occurrence of bankruptcy and other insolvency events and certain events relating to a dissolution or liquidation of the Company or Peet’s Operating Company, Inc. During the year and as of January 1, 2012, there were no borrowings under this agreement. Total unused borrowing capacity under the credit agreement was $50.0 million as of January 1, 2012.

To maintain availability of funds under the credit agreement, we pay a commitment fee on the unused portion of the line of credit.  Based upon our leverage ratio as calculated as of January 1, 2012, the commitment fee rate is currently 0.125%.

Off Balance Sheet Arrangements

The Company has no off balance sheet arrangements that require disclosure pursuant to Item 303(a)(4) of Regulation S-K.

Inflation

Over the past decade there has been very little inflation in the United States and as a result we have not seen a measurable impact of inflation on our results of operations. However, as discussed above, we have experienced price increases in commodities that we use, specifically coffee and milk, which we believe are due to market dynamics or localized supply and demand issues rather than inflation measured by the Consumer Price Index. General inflation would have the largest impact on wage rates, which could have a material impact on our results since wages are our largest single cost. Therefore, we cannot predict what effect inflation may have on our results of operations in the future.

Critical Accounting Policies, Judgments and Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires the appropriate application of certain accounting policies and judgments, many of which require us to make estimates and assumptions about future events and their impact on amounts reported in our financial statements and related notes. Since future events and their impact cannot be determined with certainty, the actual results will inevitably differ from our estimates. Such differences could be material to the financial statements.

We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. Historically, we have found our application of accounting policies to be appropriate, and actual results have not differed materially from those determined using necessary estimates.

Our accounting policies are more fully described in Note 1 "Summary of Significant Accounting Policies" in the “Notes to Consolidated Financial Statements,” included elsewhere in this report. We have identified the following critical accounting policies:

•Impairment of long-lived assets. When facts and circumstances indicate that the carrying value of long-lived assets may be impaired, an evaluation of recoverability is performed by comparing the carrying values of the assets to projected undiscounted future cash flows in addition to other quantitative and qualitative analyses. Property, plant and equipment assets are grouped at the lowest level for which there is identifiable cash flows when assessing impairment. Cash flows for retail net assets are identified at the individual store level. Upon indication that the carrying values of such assets may not be recoverable, the Company recognizes an impairment loss by a charge against current operations for an amount equal to the difference between the carrying value and the assets’ fair value. The fair value of the retail net asset is estimated using the discounted cash flows of the assets. Long-lived assets to be disposed of are reported at the lower of their carrying amount or fair value, less estimated costs to sell. Judgments made by the Company related to the expected useful lives of long-lived assets and the ability of the Company to realize undiscounted cash flows in excess of the carrying amounts of such assets are affected by factors such as the ongoing maintenance and improvements of the assets, changes in economic conditions and changes in operating performance. The Company considers the economic environment when estimating future cash flows. Based on analysis using changes in certain assumptions that could be reasonably possible, management believes the effect on the expense recognized for 2011 would not be material.

•Income taxes. In establishing deferred income tax assets and liabilities, we make judgments and interpretations based on enacted tax laws and published tax guidance applicable to our operations. We record deferred tax assets and liabilities and evaluate the need for valuation allowances to reduce deferred tax assets to realizable amounts. Changes in our valuation of the deferred tax assets or changes in the income tax provision and reserves may affect our annual effective income tax rate. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes that would have a material effect on the Company’s results of operations, cash flows or financial position. On January 1, 2007, we adopted the provisions of ASC 740, “Income Taxes,” which requires that we recognize in our financial statements the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position.

•Stock-based compensation. The Company accounts for stock-based compensation in accordance with the fair value recognition provisions of ASC 718, “Compensation—Stock Compensation”. We use the Black-Scholes-Merton option-pricing model, which requires assumptions requiring a high degree of judgment. These assumptions include estimating the length of time employees will retain their vested stock options before exercising them, the estimated volatility of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements. Changes in the subjective assumptions could materially affect the estimate of the fair value of stock-based compensation; however, based on analysis using changes in certain assumptions that could be reasonably possible, management believes the effect on the expense recognized for 2011 would not be material.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. The ASU also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs.  This new guidance is to be applied prospectively for interim periods and fiscal years beginning after December 15, 2011. The adoption of this ASU is not expected to have a significant impact on the Company’s consolidated results of operations, financial position or cash flows.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.”  This ASU eliminates the option to report other comprehensive income and its components in the statement of changes in equity.  The ASU requires that all non-owner changes in stockholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income — Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05,” to defer the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income to net income alongside their respective components of net income and other comprehensive income. All other provisions of this update, which are to be applied retrospectively, are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. As the new guidance only affects the presentation of other comprehensive income, it will not have a material impact on the Company's consolidated results of operations, financial position or cash flows.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

We invest excess cash in U.S. government, agency, municipal and equity securities. These financial instruments are all subject to fluctuations of daily interest rates. Therefore our investment portfolio is exposed to market risk from these changes.

The supply and price of coffee are subject to significant volatility and can be affected by multiple factors in the producing countries, including weather, political and economic conditions. In addition, green coffee bean prices have been affected in the past, and may be affected in the future, by the actions of certain organizations and associations that have historically attempted to influence commodity prices of green coffee beans through agreements establishing export quotas or restricting coffee supplies worldwide, as well as changes in demand, the relative strength of the dollar and speculative trading.

We currently use fixed-price purchase commitments, but in the past have used and may potentially in the future use coffee futures and coffee futures options to manage coffee supply and price risk.

Fixed-Price and Not-Yet-Priced Purchase Commitments

We enter into fixed-price purchase commitments in order to secure an adequate supply of quality green coffee beans and fix our cost of green coffee beans. These commitments are made with established coffee brokers and are denominated in U.S. dollars. We also enter into “not-yet-priced” commitments based on a fixed premium over the New York “C” market with the option to fix the price at any time. As of January 1, 2012, we had approximately $50.9 million in open fixed-priced purchase commitments and approximately $900,000 in not-yet-priced commitments priced for a total of approximately $51.8 million with delivery dates ranging from January 2012 through May 2014. A hypothetical 10% movement in the “C” market would increase or decrease our financial commitment for these purchase commitments outstanding at January 1, 2012 by approximately $78,000. See Note 13, “Commitments and Contingencies,” in the “Notes to Consolidated Financial Statements” included elsewhere in this report. We believe, based on relationships established with our suppliers, that the risk of non-delivery on such purchase commitments is low.

Item 8. Financial Statements and Supplementary Data

All information required by this item is included in Item 15 of this annual report on Form 10-K and is incorporated in this item by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Disclosure Controls and Procedures

We conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on the foregoing, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, as directed by our board of directors, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on our evaluation under the COSO framework, our management concluded that our internal control over financial reporting was effective to the reasonable assurance level as of January 1, 2012.

The registered independent public accounting firm of Deloitte & Touche LLP has issued a report on the effectiveness of the Company’s internal control over financial reporting as of January 1, 2012. See page F-2 of the consolidated financial statements included elsewhere in this report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15(e) or 15d-15(e) that was conducted during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Item 9B. Other Information 

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Information with respect to continuing directors and nominees of the Company, committees of the Board of Directors and other corporate governance matters required by Item 10 is set forth under the caption “Proposal 1 - Election of Directors" in the Company's proxy statement relating to its 2012 Annual Meeting of Shareholders (the “Proxy Statement”) and is incorporated by reference into this Form 10-K. The Proxy Statement will be filed with the SEC in accordance with Rule 14a-6(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act."). With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof. Information with respect to the executive officers of the Company is set forth in Part I of this Form 10-K under the caption “Business—Executive Officers of the Registrant” and is also incorporated in this Item 10 by reference.

Information with respect to compliance with Section 16(a) of the Exchange Act is set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is incorporated by reference into this Form 10-K.

The Company has adopted the Peet’s Coffee & Tea, Inc. Code of Business Conduct and Ethics that applies to all officers, directors and employees. The Code of Business Conduct and Ethics is available on our website at www.peets.com. If the Company makes any substantive amendments to the Code of Business Conduct and Ethics or grants any waiver from a provision of the code to any executive officer or director, the Company will promptly disclose the nature of the amendment or waiver on its website.

Item 11. Executive Compensation

Information concerning executive and director compensation required by Item 11 is set forth under the captions “Executive Compensation” and “Director Compensation” in the Proxy Statement and is incorporated by reference into this Form 10-K.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and management and equity compensation plans required by Item 12 is set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" and "Executive Compensation—Equity Compensation Plan Information" in the Proxy Statement and is incorporated by reference into this Form 10-K.

Item 13. Certain Relationships and Related Transactions, and Director Independence

Information concerning certain relationships and related transactions required by Item 13 is set forth under the caption “Transactions with Related Persons” in the Proxy Statement and is incorporated by reference into this Form 10-K. Information concerning director independence required by Item 13 is set forth under the caption "Proposal 1- Election of Directors—Independence of the Board of Directors” in the Proxy Statement and is incorporated by reference into this Form 10-K.

Item 14. Principal Accounting Fees and Services

Information concerning principal accounting fees and services required by Item 14 is set forth under the caption "Proposal 4- Ratification of Selection of Independent Registered Public Accounting Firm" in the Proxy Statement and is incorporated by reference into this Form 10-K.

PART IV

Item 15. Exhibits and Financial Statement Schedules

The following documents are filed as part of this Form 10-K.

(a)(1) Index to Consolidated Financial Statements.

The following Consolidated Financial Statements of Peet’s Coffee & Tea, Inc. and its subsidiaries are filed as part of this Form 10-K:

(a)(2) Index to Financial Statement Schedules

Schedules are omitted because they are not applicable, not required or because the required information is included in the Consolidated Financial Statements or Notes thereto.

(a)(3) Listing of Exhibits

The exhibits listed below are incorporated in this annual report on Form 10-K by this reference and filed as part of this report.

(1)        Management contract or compensatory plan or arrangement.

(b) See Item 15(a)(3) above

(c) See Item 15(a)(1) and 15(a)(2) above

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Patrick J. O'Dea and Thomas P. Cawley, each of whom may act without joinder of the other, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this report and to file the same (with all exhibits thereto and other documents in connection therewith) with the Securities and Exchange Commission, all granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders of Peet’s Coffee & Tea, Inc.:

We have audited the accompanying consolidated balance sheets of Peet’s Coffee & Tea, Inc. and subsidiaries (the "Company") as of January 1, 2012 and January 2, 2011, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three fiscal years in the period ended January 1, 2012. We also have audited the Company's internal control over financial reporting as of January 1, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A Company's internal control over financial reporting is a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peet’s Coffee & Tea, Inc. and subsidiaries as of January 1, 2012 and January 2, 2011, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 2012, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 1, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California

March 9, 2012

PEET’S COFFEE & TEA, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

See notes to consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts)

See notes to consolidated financial statements.

PEET'S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(In thousands)

See notes to consolidated financial statements.

PEET’S COFFEE & TEA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)