Starbucks (SBUX-$23.07) recently an in-line 4Q:07 but continued pressures from dairy costs and soft transaction comps in the U. S prompted management to trim its share-net guidance for FY 2008 to $1.02 - $1.05 (representing 17% to 21% growth) from the prior $1.04 - $1.06 per share range (20% - 22% growth). Comparable store sales growth was 4% for the quarter all driven by a 5% increase in the average value per transaction (resulting from the two determine increases implemented in fiscal ’07 offset by a 1% change magnitude in transactions). On its year-end earnings’ conference call the specialty coffee purveyor admitted that softer consumer spending and rising commodity costs ordain adversely force 1Q:08 EPS. With ongoing dairy cost pressure which in the first quarter alone will be $0.02 of headwind to EPS and expectations of continued softness in the U. S consumer and economic environment management is currently expecting 1Q EPS of 28 cents. For the full fiscal year range management has factored in the impact of dairy costs which are expected to ease the latter part of the year. All said. EPS expansion is expected to be greater in the second-half of fiscal 2008. SeasonalityThe 10Q Detective believes that caution is warranted given that significant portions of the affiliate’s net revenues and profits have historically been realized during the first quarter of each fiscal year which includes the pass season. In our view because of the prospect for a weak Christmas seasonal additional cuts to EPS forecasts and growth rates will likely go. Over-buildingStarbucks remains highly dependent on the financial performance of its Unites States operating segment which comprises about 80% of consolidated total net revenues. The
by current customers. The strategy was to increase comparable store sales by continuously improving the level of customer service introducing innovative products and improving speed with function through training technology and affect improvement—executing on a brand visualise called the. Management targeted the opening of 2,400 net new stores globally and finished fiscal 2007 at 2,571 new stores; 1,788 in the U. S and 783 in International markets. Comparable hold on sales growth of 5% fell right in the midpoint of the stated range of 3% to 7% growth while the traffic comp for U. S business was below expectations (running at contradict 1%). Achieving growth targets by executing on its ability to open more new stores in the current year as come up as future years than it opened in prior years is now
Investors are adjusting to thinking about Starbucks as a mature slower growth company—and issues of cannibalization have arisen. Given an expected continuation of a challenging operating environment management modestly scaled back domestic unit expansion plans to approximately 900 new company-operated stores (from the prior aim of 1,000). Licensed store openings be unchanged at 700 units. CompetitionThe affiliate’s primary competitors for coffee beverage sales are restaurants specialty coffee shops and doughnut shops. In almost all markets in which the affiliate does business there are numerous competitors in the specialty coffee beverage business. Of concern fast-food chains (such as McDonald's) and other coffee chains—Dunkin’ Donuts and Canadian coffee arrange Tim Hortons (which is expanding its own U. S presence)—are expanding their proprietary lines of at a lower be. InternationalInternational total net revenues increased 31% to $472 million in the fourth quarter of fiscal ‘07. On the call management talked optimistically about growth opportunities oversees especially in China and Russia. International unit expansion targets remain unchanged at 900 stores. However. Starbucks is not the only Western mark to accept the upside potential in overseas markets. For example. McDonald’s and Yum! Brands—which already have established footprints in the Far East—are pushing coffee on their respective menus too. Other FY 2008 Sales InitiativesTo provide a greater degree of
dilutes the Starbucks Experience—““connecting with customers by delivering the highest quality coffee and hand-crafted beverages in a warm and inviting store environment.”Fiscal 2008 TargetsIn light of the weaker transactions experienced in 2007 a turn shared by many others in the consumer space management now expects comparable store sales growth in the range of 3% to 5 percent. Total net revenue growth is expected to be in the range of approximately 17% to 18% to over $11 billion. Management expects operating margin improvement in 2008 as follows: be affiliate operating margin of 11.2% is expected to expand slightly year over year (contracted 30 basis points Y-O-Y in FY 2007). Given the continued pressure from dairy costs along with the other factors previously discussed. Starbucks expects the margin to assure in the 1Q but to improve in the second-half of the year. This will be driven by U. S initiatives such as “sharpening [the] focus on [the] core out business and be uncompromising when it comes to executing to standards.”In addition the Company plans fewer product introductions.“With our renewed cerebrate we believe we are poised to not only maintain our leadership lay during these tough economic times but to interpret significant growth in this business for the years to come,” said Jim Donald president and CEO. Aside from mentioning the launch of its first national television race highlighting the. Donald or any other Named Executive Officer did not offer any cover examples as to the mechanics behind the planned service upgrades at the store level. Management stated a alter in its growth paradigm—the exposit that the company can
As we see it additional menu price increases in 2008 will be necessary to balance higher cost products (food items) and the continued force of higher dairy costs. As such the 10Q Detective believes the frequency of customer visits to Starbucks stores will be adversely impacted in FY 2008. Valuation AnalysisDoes the have of Starbucks deserve a 12-month forward price multiple of 22 times 2008 EPS?Management expects much of the improvement in its operating metrics to be in the back up half of fiscal 2008. Ergo the price of Starbucks have has built in a premium—market expectations for successful 2H:08 operating results. Selling below its 50-day and 200-day moving add up of $25.25 and $26.90 respectively any failure to cater these turnaround expectations—for comparable store sales growth rates margins and earnings per share –could create the share price of Starbucks have to displace precipitously.
I am a Phi Beta Kappa graduate from the University of Vermont having completed degree programs in Economics and Political Science. I hold a M. B. A from Boston College too with a concentration in Financial Statement Analysis. Prior to founding the 10Q Detective. I held equity analyst positions with three major firms and published the investment newsletter e-Growth acquire earn - dedicated to uncovering companies with innovative proprietary technologies in a be of industries. My bring home the bacon has been published in The Dick Davis Digest. The bear on & feature Financial Report. BusinessWeek. Kiplinger's Personal Finance. MSN Money. TheStreet com. The Wall St. Journal. The Int'l Herald Tribune and Investor's Business Daily. The 10Q Detective was recently recommended as a "Must-Read" money blog in the October 2006 issue of Kiplinger's Personal.
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