Foolish Forecast: Starbucks and Star-Nickels

While most companies are still stuck in a rut of reporting third-quarter news on their fiscal 2006s, highly caffeinated Starbucks (Nasdaq: SBUX  ) has raced ahead, finished up its year early, and already moved on into 2007. For the lowdown on the fiscal year that was, tune in tomorrow for the firm's fiscal Q4 and full-year 2006 news.

What analysts say:

  • Buy, sell, or waffle? Thirteen out of 19 analysts rate Starbucks a buy. All the rest say hold.
  • Revenues. On average, Wall Street thinks the coffee king grew its sales by 22% in fiscal Q4, to $2 billion.
  • Earnings. Profits are predicted to be up just one penny to $0.17 per share.

What management says:
Late last month, Starbucks announced a move to tighten its control over its Chinese investments, buying out High Grown Investment Group (Hong Kong) Limited, the majority owner of Starbucks licensee Beijing Mei Da Coffee Co. Ltd., which operates 61 Starbucks retail stores in Beijing and Tianjin. What Starbucks didn't announce is how much the purchase cost.

In contrast to the difficulty of figuring out the price tag on such a convoluted deal, it's much easier to figure out the price tag on Starbucks' other recent purchase announcement: the increased share buyback plan that permitted the firm to repurchase up to 28.4 million shares starting on Aug. 2. From the firm's lowest closing price (inspired by last quarter's less-than-inspiring results) to today's three-month high, that might have cost Starbucks anywhere from $840 million to $1.1 billion. Let's hope management bought early and often -- we'll find out how much it got for its money tomorrow.

What management does:
My Foolish colleague, Alyce Lomax, put it well last quarter when she observed that "Starbucks' numbers are always so impressive that it's gotten, well, kind of boring" -- or at least, before last quarter. After a run that showed no signs of ending, until it did, Starbucks' rolling gross and net margins finally took twin tumbles last quarter. Operationally, however, the firm remained magnificent, growing its operating margin yet again (the rolling number, that is to say; the quarterly operating margin actually declined on the introduction of stock options expensing).

Margins %

4/05

7/05

10/05

1/06

4/06

7/06

Gross

58.7

58.8

59.1

59.3

59.5

59.4

Op.

11.8

12.0

12.3

12.4

12.4

13.1

Net

7.6

7.7

7.8

7.8

7.8

7.7

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Motley Fool Stock Advisor co-lead analyst David Gardner (note to self: We've got to come up with shorter job titles around here) has almost always been bullish on this coffee king, and the stock's run-up over the last three months certainly seems to be vindicating him.

Stock Advisor subscribers who caught David's August update will recall that (unlike Wall Street's Wise Men) he saw no reason to worry over last quarter's Frappucino-fraught slackening of Starbucks' same-store sales growth. Rather, David argued that strong demand for the companies' products was a good thing (surprise!) and that "concerns about consumers paring down coffee allowances are overblown."

It seems Starbucks agrees with David, because no sooner had the analysts begun worrying about the issue than Starbucks made the bold move of upping the price on its drinks by a nickel, and on its bags o' beans by four bits. Not a gambit management was likely to pull if they thought consumers had begun pinching their nickels. Tune in tomorrow to find out who was right.

Competitors:

  • Caribou Coffee (Nasdaq: CBOU  )
  • Diedrich Coffee (Nasdaq: DDRX  )
  • Green Mountain Coffee (Nasdaq: GMCR  )
  • Peet's Coffee (Nasdaq: PEET  )

How did we read the coffee grounds last quarter, and how did Starbucks' fortune turn out? Indulge yourself in a double-cup of coffee-flavored Foolishness with:

Take Motley Fool Stock Advisor for a 30-day free trial.

Fool contributor Rich Smith does not own shares of any company named above.


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