Starbucks Pours It On

By Sham Gad | January 25, 2010 AAA

Just about everything went right for Starbucks (Nasdaq:SBUX) in the 2010 fiscal first quarter. Coming off a year in which cash-strapped consumers were quick to give up their $5 mochas, Starbucks apparently had other ideas. It appears that new management is orchestrating the company turnaround very successfully.

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Brewing the Perfect Quarter
Just about everything went right for Starbucks in the quarter. Sales were up 4% to $2.7 billion, comparable store sales were up 4%, which was driven by both increases in store traffic and average ticket price. If that wasn't enough, the company's margins were up by 8.5% to 13%; as a result, the company earned 32 cents in the quarter, up from 9 cents in the year-ago quarter.

Most analysts were not expecting such an impressive quarter. It was hard to foresee whether struggling consumers would still shell out for pricey high-end coffee drinks, especially when companies like McDonald's (NYSE:MCD) were introducing better quality coffees for much less.

Habits Die Hard
What worked for Starbucks is simply management that delivered. Take an excellent franchise like Starbucks and pair it up with able and competent management and what you get is reflected in the quarterly results. It's the same concept that made names like Amazon (Nasdaq:AMZN), Chipotle (NYSE:CMG) and Whole Foods (Nasdaq:WFMI) so successful over the years. Starbucks clearly has a product that millions of people have become habitually tied to. In places like airports and casinos, where there is a Starbucks around every corner, the high foot traffic coupled with the fact that people are on the go ensures tremendous sales at these outlets. Apparently management sees this, as they are closing locations that no longer fit with the company's operating strategy going forward. (For related reading, check out Squeeze A Greenback Out Of Your Latte.)

Don't Get Burned
Annualizing Starbucks' first-quarter results suggests a 2010 EPS of approximately $1.20. This still implies a 20 times earnings multiple versus over 40 today. While some can argue that paying 20 times earnings for a growing business is a fair price, I would still exercise caution about Starbucks at current levels. Markets are forward-looking creatures by nature and so far, they seem to have it right with Starbucks. An excellent business it is, but whether the current price represents a bargain today is much more questionable. (For more, check out The Value Investor's Handbook.)

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