Starbucks Stays Strong

Starbucks (Nasdaq: SBUX  ) just ended the strongest year in its history. For the year ended September 28, same-store sales were up 8%, total sales jumped 24% to $4.1 billion, and earnings, like Mexican jumping beans, will likely come in 24% higher (we'll see full results next month).

While many companies will have relatively easy 2003 comparisons going forward, Starbucks certainly will not. It will not be easy for the bean grinder to grow at this rate again next year, but there are reasons to believe it will satisfy investors anyway.

One big reason is Starbucks' international business. The company has 1,600 stores overseas and will open its first store in France next year, but there's more to it than big numbers and new openings. The international chain as a whole has never been profitable, but it should be in 2004.

All those international stores have been a drain on earnings until now, but next year that's finally expected to go the other way, giving Starbucks another new boost to the bottom line.

Overseas profits could further benefit in 2004 from the weak dollar. A weak dollar against foreign currencies means overseas profits convert to greater numbers of dollars when turned into U.S. earnings per share.

In fact, Starbucks doesn't need such minor advantages in order to grow. The Starbucks card remains relatively new and continues to drive sales, as do self-serve coffee islands in some stores. On top of these concepts, Starbucks will roll out several new drinks again next year, all with hopes of keeping U.S. traffic growing.

One risk the company faces, some argue, is higher coffee prices that cut into margins. The thing is, coffee prices have been at record lows and Starbucks has locked in long-term contracts at going prices for as long into the future as possible (often six months at a time, sometimes a year or longer), so it has hedged coffee prices, prepared for fluctuations, and is able to largely mitigate risks.

All of which makes an argument that 2004 could be another strong year. Analysts are projecting 22.5% earnings growth next year. Before that, 2003 results are due out Nov. 13. Earnings per share of $0.17 are expected for the fourth quarter, and $0.67 for the year, putting the $30 stock at 44 times trailing estimates -- 35 times year-ahead estimates.


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