BREWING A REBOUND?
Diedrich Looks to Build on Subtle Sales Gains, Narrower Losses
By JENNIFER BELLANTONIO
The new interim head of Irvine-based Diedrich Coffee Inc. says he’s working to stem losses and increase same-store sales, even as he helps look for a permanent chief executive for the struggling coffee house operator.
Phil Hirsch was tapped to run Diedrich in March after J. Michael Jenkins stepped down to undergo treatment for gastric cancer. Hirsch, the former president of Irvine-based CUE Digital Radio Corp., part of CUE Corp., also is in the running the permanent post.
Diedrich has been working for the past 18 months to right itself as Seattle-based Starbucks Corp. and Los Angeles-based Coffee, Bean & Tea Leaf keep drinking up market share.
Diedrich’s shares saw a runup late last year on the company’s retooling but pulled back early this year and since have been flat. Last week, Diedrich’s stock was trading at around 3 with a market value of around $16 million.
The company cut about 50 workers (it now counts a staff of 550) last year, Hirsch said, and closed or sold off 43 unprofitable stores, including some of its mall-based Gloria Jean’s Coffees shops.
Diedrich also sold most of its Coffee Plantations cafes but still operates Coffee People, a fourth brand.
These days, Diedrich counts 371 coffee shops, 74 owned by the company and the rest franchised.
The changes have put Diedrich on more solid ground, according to Hirsch.
“We should be in the position of turning a corner and making money this year,” he said.
Two years ago, the company posted an annual net loss of $22 million, while last year it narrowed that loss to $4 million.
For the quarter ended March 6, Diedrich reported an operating loss of $77,000 vs. a loss of $305,000 in the year-ago period. Revenue fell 17.5% to $13.1 million in the quarter due in part to the sale or closure of stores.
Same-store sales also were down for the quarter, though there was a bright spot: the decline was lower than previous quarters. Diedrich stores open at least a year showed a 2.4% decline for the quarter, less than the 5.2% drop in the December quarter.
“We intend to continue that trend,” Hirsch said.
To do so, Hirsch said Diedrich plans to grow same-store sales and cautiously build its franchise and wholesale coffee-selling operations.
The company posted a 16.8% decline in wholesale sales for the March quarter, primarily because it quit selling lower-profit coffee products to franchisees and saw a slump in coffee bean sales, according to financial statements.
“As we complete the turnaround phase we need to look at how we can create value in the company,” Hirsch said. “You can’t just do it by cutting costs. We’re looking at several ways to grow the business.”
Two weeks ago, the company launched a new Internet site for Gloria Jean’s, which allows visitors to buy coffee, tea and cocoa online for the first time, according to Hirsch.
Coffee People’s site also sells coffee, and Diedrich will soon too, he said.
The Diedrich site is expected to relaunch with online sales in a month or so, Hirsch said.
“We’re looking at using the Internet to increase brand awareness, particularly in areas that we don’t have store locations,” he said.
Meanwhile, Diedrich’s biggest rival Starbucks continues to build steam. Sales at stores open at least 13 months rose 7% in the five weeks ended March 31 (same store sales were up 6% in February and 7% in January).
The company posted revenue of $316 million for March, up 25% from the year-ago period.
Starbucks opened 119 new stores in March (five of which were in Orange County), bringing its worldwide total to 5,368.
Despite cutthroat competition from Starbucks and smaller foes, such as family-owned Coffee, Bean & Tea Leaf, which is opening shops in OC, Hirsch said the pressure isn’t all bad.
“It’s a very competitive environment,” he said, adding that it makes jockeying for real estate tough. But “good competitors tend to validate a marketplace,” he said, and increase people’s awareness, “which is very positive.”
