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Investors See Cup Half Empty Despite Progress at Farmer
Bros.
WALL STREET WEST
Shareholder
discontent is still brewing at Farmer Bros. Co., even after the
Torrance-based coffee company made concessions to dissident shareholders
that included a recent 10-for-1 stock split.
New York investment banker Gary Lutin, who runs an investor forum for Farmer
Bros. shareholders, drafted a letter dated May 18 requesting that management
explain, among other things, why coffee sales are declining and the
company’s service area shrinking.
For the third quarter ended March 31, Farmer Bros. net income fell 40
percent, to $10.7 million, compared with $17.8 million for the like period a
year earlier. Revenue declined 0.1 percent, to $49.1 million.
In a May 13 press release, the company said the “sales trend continues to
reflect general economic conditions.”
It also cited legal costs, pension and other employee costs, and the costs
of implementing a new information system as reasons for the decline in net
income.
By comparison, competitor Starbucks Corp. last week announced an 11 percent
increase in May same-store sales. At Peet’s Coffee & Tea Inc., first quarter
sales rose 19 percent and net income rose 41 percent.
Farmer Brothers shares fell to $26.05 on May 17, the day before Lutin issued
his letter, from $32.63 at the close on May 13. (By May 26, the shares had
recovered to $29.)
“Most of the concerns in the letter have been there all along, but there are
things that became heightened as a result of the last quarterly reports. It
was their lack of explanation for what was going on,” Lutin said.
In the past, Lutin has written numerous letters seeking information that the
tight-lipped company has been reluctant to give out.
James Lucas, spokesman for Farmer Bros., said the company has not responded
to Lutin’s past letters because the concerns are not founded.
“The problem with a lot of this letter is that it is silly and irrelevant,”
Lucas said.
The letter raises five concerns: declining coffee sales; a shrinking service
area; the cost of an information systems project; the management of
derivatives investing; and the vulnerability of the company’s debt-laden
employee stock ownership program to a decline in Farmer Brothers’ share
price.
“The company needs to either develop the strategies and management to lead
the company effectively or it needs to sell the company’s business to
somebody else that can manage it effectively before its strategic value
deteriorates,” Lutin said.
– Karey Wutkowski
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