Bean Counting

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Things could soon perk up at Farmer Bros. Co.

After years of losing money, the Torrance-based manufacturer and distributor of specialty and standard coffees has revamped its leadership team and made some big acquisitions.

Sales have nearly doubled, but the company is shedding even more red ink than in the past. In addition, its stock remains moribund, and has been trending down for the past six months.

Yet management is hopeful that the company will start showing better results as early as its next quarterly report, scheduled for later this month. Sometime in the next fiscal year, Chief Executive Rocky Laverty expects Farmer Bros. to break even.

“I’ve only been here for four years,” said Laverty, who joined Farmer Bros. after serving as CEO of Irvine-based Diedrich Coffee Inc., “but Farmer Bros. has been here for nearly a hundred. The company is in a solid market position and we have invested to prepare for what we hope will be the next hundred years.”

Laverty almost immediately spent $22 million in stock and cash to acquire Coffee Bean International, one of North America’s first roasters of specialty coffees, based in Portland, Ore. The purchase put Farmer Bros. into the specialty coffee market. Then, the company last year spent an additional $45 million to acquire the retail coffee direct-delivery business of Sara Lee, which had long been a strong competitor.

Noble Trenham, the 76-year-old chief executive of First Global Capital Ventures in Pasadena, has been a Farmer Bros. investor for years. While he acknowledged that he hasn’t been “superexcited about the momentum of the company” in the past, he’s hopeful that soon could change.

“They have a real coffee man in there who’s a marketing whiz who I suspect can do some good,” he said, referring to Laverty. “It’s time to get some sizzle. Have they gone anywhere yet that will make the shareholders happy? The answer is no, but I still have my stock on the wall.”

Sales nearly doubled to $232 million for the first half of fiscal 2010 as a result of the acquisition, making Farmers Bros. the largest direct-store coffee and allied products deliverer in the nation. But for the six months ended Dec. 31, 2009, the company reported an operating loss of $7.6 million, compared with $4 million for the same period in 2008 the prior year.

Farmer Bros. does not provide earnings projections.

Zack Investment Research, based in Chicago, has projected losses of 10 cents per share in the fiscal year ending June 31. By the end of fiscal 2011, however, Zack projects that the company should be earning about 22 cents per share.

That would be the first whiff of profitability for Farmer Bros. in years.

Consolidation

When Laverty took over, he inherited management of a family-owned company that had started in 1912.

The company buys coffee beans from brokers around the world. It then roasts, grinds and packages them into several brands at three plants, one in Torrance and two more as a result of the expansion. The coffee is shipped by the company’s fleet of large trucks to its distribution facilities. From there, it is delivered to food service operators at truck stops, restaurants, hospitals, casinos, hotels, businesses and coffee shops nationwide.

In addition to offering such related products as cappuccino and coco mixes, spices and teas, the company provides and services the machines that restaurants and convenience stores use to brew coffee.

The 2007 acquisition of Coffee Bean International – which still operates separately under its own name – added a roasting facility in Portland. In purchasing Sara Lee’s direct-store delivery business, Farmer Bros. spokesman Jim Lucas said the company acquired more than 20,000 new customers, a host of new brands, 60 branch facilities, a fleet of vehicles, a distribution center in Oklahoma City and another roasting plant in Houston.

In April, the coffee company announced the appointment of a new treasurer-chief financial officer to help pull it all together: Jeffrey A. Wahba – chief financial officer of Nero AG, a digital-media software provider in Glendale – who will make the move in June.

Lucas said the company is integrating its operations in manufacturing, warehousing, distribution, accounting and information technology.

In the future, he said, it intends to roll out new products, freshen up the packaging of existing ones and focus more on selling to chains in a play for market share.

“Farmer Bros. has been losing money for a long time,” Lucas said. “Part of our strategy is that, if you bring together these companies, you put more revenue on the platform with the goal of breaking even this year.”

There are skeptics.

Bennett Stewart, chief executive of EVA Dimensions, a New York company that evaluates stock investments, has his doubts.

“Other than the fact that their sales are growing rapidly, the company is losing value,” he said. “What saves them is that they trade for only a modest premium. The entry price at which investors can walk in is conservative, which we judge to be fair.”

But there may be better investments out there.

“The company may be stretched too thin,” Bennett said. “For being a manufacturer, wholesaler and distributor, this is a tiny company. They’re going up against giants like Starbucks and Dunkin’ Donuts.”

Concerns allayed

Gary Lutin, a New York investment banker who formerly facilitated an online forum for shareholders urging major changes at Farmer Bros., said his concerns have been addressed.

“The company has instituted virtually all of the governance, policy and strategy initiatives we had been urging,” Lutin said. “Farmer Bros. now seems to have all the resources in place to operate as a viable national coffee business; I think competent management could easily succeed.”

A shocking event in the company’s history occurred when criticism reached a peak and investors were calling for sale of the company. Roy E. Farmer, grandson of the company’s founder, who had recently taken the reins of the business, took his own life.

“It was very disconcerting,” Lutin said. “A lot of people felt terrible.”

It’s a tough industry, said Jack Plunkett, chief executive of Plunkett Research Ltd., based in Houston, which follows Farmer Bros. and other food companies

“The food industry, while very appealing because the market is so immense, is always challenged by low profit margins,” Plunkett said. “The competition is so fierce in virtually every sector that it takes a really well-managed company to prosper.”

The recent acquisitions to widen Farmer Bros.’ reach, he believes, were positive moves.

“To a large extent,” Plunkett said, “when speaking of the food industry, bigger is better, so they’ve taken the right steps.”

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