Starbucks (SBUX) achieved a trifecta of positive earnings news on Wednesday after the close; it beat EPS estimates, topped sales estimates, and raised earnings guidance for the coming year. Earnings per share came in at $.32, four cents better than consensus analysts’ estimates and far better than a year ago when the company made just nine cents per share. Sales were $2.7 billion also better than the Street’s estimates of $2.6 billion. There were positive signs that business is improving throughout the release, and the only potential blemish is that there was no announcement of a stock buyback that many had hoped would come. Not surprisingly, the shares are rallying after hours touching its highest levels sense November of 2007.
It seems consumers view Starbucks coffees as one of life’s little luxuries and are more willing to pony up for drinks and maybe even a muffin these days than they have been since before the recession. Traffic to Starbucks stores is up 1% over last year, but average ticket price has increased 4% and is a much bigger reason why same-store sales were up 4%. A survey of analysts by FactSet Research showed a same store sales gain of 1.2% was all that was expected.
In addition to these positive sales trends, the company is also spending money more efficiently as the company increased margin by lowering operating costs. This is partially due to the company closing down underperforming stores over the past few months and “in-store labor efficiencies”. Starbucks has renewed its effort to differentiate itself from competitors like McDonald’s (MCD), with the key being the Starbucks coffee-house experience. Those efforts appear to being paying dividends and fending off McDonald’s is no small feat.
In 2010, Starbucks will continue to focus on improving and growing its international business in the year ahead, albeit at a slower rate than in previous years. They plan to add 200 international locations compared to just 100 domestically, and these new stores combined with moderate comparable store sales should help drive mid-single digit revenue growth next year. Starbucks management plans for the company to earn $1.05 to $1.08, which would imply impressive earnings growth of more than 25%.
Starbucks’ CEO Howard Schultz has guided the company through a trying period since returning in January 2008, and it is hard to deny the company has rebounded stronger than most anyone would’ve expected. At Ockham, our methodology places a Fairly Valued rating on SBUX shares, yet we would not be concerned about overvaluation based on current fundamentals unless the stock gets to $31. Coffee-stocks have been some of the hottest stocks in the market for the last six months or more, and Starbucks has actually outpaced some of its smaller competitors such as Caribou Coffee (CBOU), Peet’s (PEET), and Green Mountain Coffee Roasters (GMCR). This stock does not fit into our typical definition of a great value stock, but we think there may be significant upside potential with consumers really cherishing the smaller luxuries in life.
