Starbucks (SBUX) Slides Despite Beating Street Estimates

Last Thursday, coffee giant Starbucks (SBUX: Charts, News) reported its highly anticipated second quarter earnings, topping analyst estimates for both its top and bottom lines. Starbucks earned 40 cents per share, or $309.9 million, on revenue of $3.2 billion. This was a substantial gain from the 34 cents per share, or $261.6 million, on revenue of $2.79 billion, it reported in the prior year quarter.

Analysts had expected the company to earn 39 cents per share on revenue of $3.18 billion. However, shares slid after the strong report due to concerns regarding weakness in Europe and a slight decline in same-store sales. Looking ahead, Starbucks forecasts earnings between $1.81 to $1.84 per share, slightly missing the analyst consensus of $1.86 per share.

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Same-store sales in Starbucks cafes rose 7% globally, with a robust 8% gain in the Americas offset by a 1% decline in its region including Europe, the Middle East, Russia and Africa. CFO Troy Alstead attributed Starbucks' European weakness to the instability of areas hit hard by ongoing economic turmoil. Alstead compared the European market to the American one, stating, "It's not unlike what we experienced in the U.S. a few years ago." Alstead outlined the company's solution to its European problem, declaring that loyalty programs, improved service and more localized flavors would all be used to curb waning demand. In France, Starbucks widened its espresso offerings to cater to local tastes, and in recession-hit Greece, offered cheaper beverages. CEO Howard Schultz remained upbeat regarding Starbucks' European prospects. "I will tell you unequivocally that we will turn the European business around in the same way we turned the U.S. business around," he stated.

Meanwhile, same-store sales rose an unprecedented 18% in its China and Asia Pacific region. CEO Howard Schultz has declared China, where it intends to open 400 new stores this year, as its most important expansion effort. Schultz plans for its Chinese stores to become its second largest market, after the United States, by 2014. Last year, Starbucks announced a partnership with Chinese farmers to produce local Arabica beans, which would reduce its import expenses substantially. Since coffee bean prices have declined over 30% over the past year, most analysts expect Starbucks' margins to improve throughout 2012, even as other commodity prices rise. Last week, Howard Schultz also reportedly met with Jiang Zemin, the former President of China, to discuss business opportunities in China.

Across the world, Starbucks, which operates 17,000 cafes, plans to add approximately 1,000 new stores this year. However, the company is not planning to expand further into its Europe, Middle East, Russia and Africa region.

Looking ahead, Starbucks also plans to take on its partner, Green Mountain Coffee Roasters (GMCR: Charts, News), and Nestle with its single-cup coffee machine, the Verismo. The Verismo is considered a follow-up to the company's immensely popular Via instant coffee line, and will help the company remain competitive in Europe, where Nestle's Nespresso machines lead the market. The Verismo, which will be sold with a razor and razor blades business model, is expected to be popular in the Americas and China as well. Starbucks currently sells K-Cup portion packs for Green Mountain's Keurig single-serve brewers. This business segment, which also includes Starbucks-branded ice cream, posted a 57% jump in revenue to $321.5 million.

Starbucks has also shifted away from its core coffee beverages with its new "Refreshers" energy drink line as well as its experimental Evolution Fresh Inc. juice store, which is expected to put pressure on juice chain Jamba Juice JMBA.

Despite Starbucks' 6% slip on Friday, investors and analysts remain bullish on the stock, which has an average price target in the mid $60s. Starbucks' aggressive expansion into China and India, as well as its strong packaged goods sales, will keep the company churning on all cylinders all throughout 2012. Shares currently trade at 24.3 times forward earnings and pay a 17 cent quarterly dividend.

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Published on Apr 30, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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