The local coffeehouse chain that once had grand international ambitions has scaled back.
The strategy could be working.
Shares of Irvine-based Diedrich Coffee Inc. have more than doubled since the end of May. At a recent check of $8.50 a share, Diedrich has a market value of $44 million.
Late last year Diedrich sold the international operation of its Gloria Jean’s chain to Australia’s Jireh International Pty. Ltd. for $16 million upfront and as much as $7.3 million more during the next six years.
Diedrich plans to use some of the funds to build up its remaining three retail units: Diedrich Coffee, Coffee People and its Gloria Jean’s U.S. chain.
“We are a company with a lot of cash on the balance sheet, and no debt,” said Diedrich Chief Executive Roger “Rocky” Laverty.
Diedrich, which trades on Nasdaq, recently straightened out its stock listing status. The company filed an overdue earnings report and outlined plans to refile its annual reports for the past three years because of a change in accounting for its store leases.
A majority of Diedrich’s thinly traded shares are held by a few.
The biggest holder is Paul C. Heeschen, Diedrich’s chairman since 2001, and his partners. Heeschen’s investment company, Sequoia Enterprises LP, owns about 34% of Diedrich’s shares.
Santa Cruz-based Westcliff Capital Management LLC controls about 18% of Diedrich’s shares, with Peninsula Capital Management Inc. holding about 11%.
Diedrich’s financial results have steadied after several years of decline.
Factoring out a gain from the sale of the Gloria Jean’s unit, Diedrich posted a loss of $873,000 in the quarter ended March 9, versus a loss of $709,000 a year earlier. Revenue from its coffee shops and roasting business was flat at $11.6 million.
After mounting an overly aggressive global expansion of its coffee chain in the late 1990s, the company plans to go forward with a more cautious approach.
In 2002, Diedrich had 371 coffee shops, including 74 owned by the company and the rest franchises. Today, Diedrich has 199 coffee shops, including 61 that it owns.
The company plans to franchise 50 to 60 Gloria Jean’s stores, particularly in the Northeast, next year, said Laverty, who took over as chief executive two years ago.
Some 20 Diedrich Coffee and Coffee People cafes are set to open in their strongholds.
Diedrich’s Coffee People cafes are mainly in the Portland, Ore., area. After buying the popular Portland hangouts years ago, the company renamed them under the Diedrich brand.
That was a mistake, Laverty said. The locations since have gone back to the Coffee People name.
The company has 21 Diedrich Coffee locations in Orange County, with two each in West Los Angeles and San Diego. Diedrich has about 25 Coffee People stores, with three under construction.
Laverty said the company wants to build the Diedrich’s brand name in OC just as local surfwear and apparel companies have done.
“We want to be tied to the community,” Laverty said.
Diedrich is readying to launch an advertising campaign on Oct. 15. The TV ads poke fun at big coffee chains such as Starbucks.
“Not So Big” will be Diedrich’s pitch, emphasizing that the company’s coffee has small, medium and large sizes, rather than Starbucks’ tall, grande and venti sizing that can be confusing, Laverty said.
Some employees already are sporting T-shirts with a “Venti Schmenti” message.
The company also hopes to benefit from its free Internet service for laptop users, Laverty said. One problem has been Internet users who spend all day at Diedrich coffee shops without buying anything.
Diedrich is testing a system at a couple of its locations where Internet users get a free hour of service, but have to buy something to get more time, Laverty said.
Starbucks uses a different approach, charging customers who sign up for a one-year deal $29.99 a month for wireless Internet service through a pact with T-Mobile USA Inc. Service costs $39.99 a month without the one-year deal.
Meanwhile, Diedrich still is sorting out its lease-related accounting issue for 2002 through 2004. The company has tapped BDO Seidman LLP to take over its future audits, but must wait for former auditor KPMG LLP to finish its analysis.
The accounting issue is one that many publicly traded companies in the restaurant industry have been grappling with. New accounting standards call for a shorter depreciation period for store leases, which negatively impacts income.
