Thursday, September 6, 2007

Why Can't Starbucks Be Honest With Investors?

Back in May I posted "Starbucks (SBUX), which uses an estimated 93 million gallons of milk a year, is looking at a $279 million milk bill in 2007. While it may not seem a lot to a billion-dollar company, it does equate to 36 cents a share, an increase of about 9 cents, or about 10.3% of profits, over 2006. This does not include the price increase to be incurred from changing the percentage of hormone-free milk from 27% to 37%. Starbucks does charge 50 cents more at some locations for this milk, so it must cost considerably more, no? When you are guiding 83 to 87 cents a share and 18% growth, the 10% of that in milk costs is huge.

I followed it up at the end of the month with a post that exposed the real reason for Starbucks's switch to 2% milk "According the USDA, 2% milk averages 8 cents a gallon less than whole milk" and said it was the real reason for the change, not their stated reason of "listening to customers".

Near the end of June I took management to task when they finally admitted "rising dairy cost" would make meeting the "high end of earnings estimates very challenging". In it I wondered said "When some guy in Massachusetts is more honest with you about a company he has no financial interest in than the people you entrust to run it, there is a serious problem."

As recently as the end of last month in a post I objected to a report that milk prices were due to fall in the very near future.

Where is all this going? Peter Bocian, CFO at Starbucks, said Wednesday that the company expects dairy prices to be a "negative" in 2008. He said that the company has tried to offset the higher prices of dairy and other commodities through two price increases in the last 12 months. Here is my beef. Starbucks seems to just let this stuff trickle out very ambiguously without really giving investors anything to quantify. Starbucks must contract out is milk purchasing so they must have a solid idea of what the "negative" will be but, they give us nothing.

I have made several calls to Starbucks corporate offices and have been told "we do not disclose that information". So, we are left to guess. Since they have been in such denial about it and very slow to announce it to date, the guess must be to the downside to protect you. Despite Starbucks's claims and reaffirmation of guidance, I am convinced investors have a earnings warning or downgrade in their future.

Starbucks has just been too secretive to expect anything else...

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