Thursday, August 2, 2007

Starbucks Earnings.... A Meet and More Admissions

Starbucks (SBUX) released earnings Wednesday and the results were well, uninspiring? They reported a 9 percent rise in quarterly earning, helped by more than 1,000 new stores, and backed its full-year profit outlook.

Net income for the fiscal third quarter was $158 million, or 21 cents per share, in line with the average estimate of Wall Street analysts. Last year, Starbucks earned $145 million, or 18 cents per share.

Sales at coffee shops open at least 13 months, a key retail measure known as same-store sales, rose 4 percent. Customer transactions increased 1 percent, while the average value per transaction was up 3 percent. Here is the quote that matters and it is from my buddy CEO Jim Donald. He said in an interview that "a lot of things" kept customer transaction growth small, including new stores taking business from older ones and weakened consumer spending.

"Maybe people aren't going four times a week," he said. "Maybe it's three times a week."

Okay, so I have not been crazy after all the last 6 months in saying people are not going to the stores as often as before?

Starbucks earlier this week raised prices on coffee and other drinks by an average of 9 cents a cup. Chief Financial Officer Michael Casey said in another stunner that, while price increases have not historically affected customer traffic, this time could be different since the company raised prices less than a year ago.

"We acknowledge the possibility that it might have a short- term negative impact on traffic," he said. Where have we heard that before?

Also for the first time in my memory Casey admitted "I don't expect that the bottom line growth rate, absent some transformation in the business, is going to re-accelerate up to the 25 percent level again,".

The only people who should be happy about this call are the SBUX shorts and McDonalds (MCD) shareholders. In one call they admit that their new prices will shrink store traffic that is already falling and that the big growth days are over. This call for a re-evaluation of the premium people should pay for shares and that premium will be lower (and it is not 35 times earnings).

If they are relying increasingly on prices increases and ancillary sales for growth, lower store traffic will compound the negative effect on that..

Let's reverse everything. was there anything on the call that would make you think the current trends, which are negative, will reverse? Me either..

Here is another great take on Starbucks from Jeff Mackey


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