Starbucks Shines On

Coffee chain Starbucks (Nasdaq: SBUX  ) had such a strong December -- with an 11% gain in year-over-year same-store sales -- that management raised guidance for the first fiscal quarter ended Dec. 28 and for the year ahead.

Over the recent five-week period, sales rose 26% to $423 million; during the full quarter ended Dec. 28, revenue jumped 28% to $1.3 billion. Top-line growth that strong hasn't been witnessed at Starbucks since 2000, while the same-store sales results were the best since 1992.

Strong receipts in holiday beverages, gift packages, and higher traffic drove results. The month ended in a bevy of gift card purchasing, too, which bodes well for early 2004 because gift card sales are not booked until used.

With 7,500 locations, the coffee giant now expects $0.25 to $0.26 in earnings per share for the first fiscal quarter ended last month, up from the $0.24 per share consensus estimate. For fiscal 2004, the company raised earnings guidance to a range of $0.84 to $0.87 per share. That represents very strong 25% to 30% growth over 2003 results (although, take note: 2004 will have one extra week of results, adding about $0.02).

At $33, the stock trades at 38 times the new year-ahead estimates. It's at 55 times free cash flow as of Oct. 31 results.

After nearly 13 years as a public company, Starbucks offers investors many lessons. Critics have continually called the stock over-priced, yet it consistently outperforms.

Throughout the recent bear market, Starbucks' "lofty" valuation held up because the company continued -- and was one of the few -- to grow its business. Investors pay up for growth even in bear markets. (Pricey eBay (Nasdaq: EBAY  ) was another example of strength -- see related story.)

Then there's free cash flow. Starbucks didn't achieve it annually until the year ended Oct. 2000, but that did not stop the stock from being a top-performer. It can be folly to argue that a company lacking free cash flow is over-priced when the business's trajectory is clearly calling for free cash flow in coming years. Attentive investors will foresee approaching improvements well before they arrive on the cash flow statement, and they'll pay up for them.

Meanwhile, Starbucks' business is apparently still just hitting its stride.


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