Starbucks Serves Up Stale Q4 Results

By Glenn Curtis | November 12, 2008 AAA

Investors with the ability to identify and act upon trends early in the trading game have the potential to make a lot of money. Just ask the investors who hopped on the Berkshire Hathaway (NYSE:BRK.A) and McDonald's (NYSE:MCD) trains 15 years ago. Like the investments giant and the world's most famous hamburger maker, Starbucks (Nasdaq:SBUX) has had an almost cult-like following since the early 1990s that sent its share price soaring. However, a successful concept does not guarantee sustained demand.

A Worldwide Caffeine Fix
According to the Starbucks website, the chain got its start in the early 1970s under the name Starbucks Coffee, Tea and Spices. In 1992, the brand went public and the company embarked upon a rapid expansion. What started as a humble beginning grew into more than 16,000 stores worldwide as of the end of the company's third quarter on June 29. Starbucks' past growth capacity can be attributed to the tasty coffee and food options served by friendly staff at the company's cozy and modernly decorated cafés.

Recently, however, Starbucks has shown signs of fragility. The company's third quarter same-store sales for the U.S. market dipped to single digits. In addition, shares of the one-time high flyer now trade around 50% off the 52-week high of $24.40. Given the slowing economy, many individuals are likely to rethink the ritual of spending of $4 a day on a caffeine fix. Moreover, Starbucks faces increasingly tougher competition from fast food chains like Dunkin Donuts and McDonald's, which now serve iced coffees and espresso drinks, like lattes and cappuccinos. (For more on competition and its role in business, check out the Competition section or our Economics Basics Tutorial.)

Lukewarm Quarterly Results
In the period ended September 28, the Seattle-based company generated a profit of 10 cents per share, excluding charges, which was just 3 cents shy of analyst expectations. In addition, Starbucks' comparable U.S. store sales were off by 8%. Compared to McDonald's, which is coming off of a 7.1% increase in global comps for the quarter, Starbucks' numbers look particularly lousy. (For more on analyst expectations, read Analyst Forecasts Spell Disaster for Some Stocks.)

On the plus side, Starbucks managed to trim its general and administrative costs to 3.8% of sales for the quarter, down from 5.1% last year. However, this area of belt-tightening most likely will not amount to a catalyst for immediate major change. Analysts expect 87 cents per share for the current year, which some find to be a respectable gain for a stock currently trading around $10. Whether or not the stock will meet expectations, however, is yet to be seen.

Bottom Line
Starbucks has the potential to make a comeback. However, with problems resulting from the downturn of the U.S. economy and increased competition from chains that sell inexpensive alternatives to Starbucks' famed beverages, it is probably best to wait this one out for now.

(For more on analyzing food and beverage stocks, read Sinking Your Teeth into Restaurant Stocks.)

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