Interesting Times at Starbucks

"May you live in interesting times." According to some people, that saying is not just a Chinese proverb but also a curse. And this has been quite an interesting year for Starbucks (Nasdaq: SBUX  ) , which for so long consistently doled out such good results that it's been a long-running joke here at the Fool about how boring it was. Well, lately, boring it is not.

In a rather strange turn of events for Starbucks, fourth-quarter net profit fell 5% to $117 million, or $0.15 per diluted share. However, this quarter isn't exactly an apples-to-apples comparison to this time last year, given changes in accounting for stock-options compensation and asset-retirement liability. According to Starbucks CFO Michael Casey, the company's earnings excluding the retirement liability and stock-based compensation would have increased 23% over last year.

Starbucks' sales, meanwhile, did increase a respectable 21% to $2 billion. And same-store sales rose 5% for the quarter. Considering that Starbucks pushed through a price increase on its coffee recently, it's interesting to note that that number breaks down to 4% transaction growth and 1% ticket growth.

The company's operating margins took a significant hit this quarter, again influenced by the accounting changes as well as higher labor costs. Operating margin dropped to 9.9% of sales, versus 11.8% of sales this time last year.

When it comes to one component of its drop in operating margin, Starbucks' management pointed out that rising labor costs go hand-in-hand with its aggressive expansion plans -- it's got more assistant managers these days. "Investment in our future store leaders is paramount," the company said, and I do agree that that makes sense from the point of view of building a good long-term business with happy help, so that it doesn't fall apart in its goal of serving customers. Still, it seems that many investors don't want to wait around to see whether this long-term strategy works out.

I thought the market's reaction to last quarter's results was kind of silly. This time around, though, silly isn't the word for it -- I can understand it even if I don't agree. This does go beyond the usual more ho-hum concerns of the past that comps were a little lighter than usual or that competitors such as McDonald's (NYSE: MCD  ) , Dunkin' Donuts, Caribou (Nasdaq: CBOU  ) , Peet's (Nasdaq: PEET  ) , and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) might be breaking Starbucks' magic spell on its customers.

For example, Starbucks said in its conference call that gross margin is going to be flat in 2007 on a year-over-year basis. Plus, although it's guiding for 2,400 new stores in 2007, 20% growth in sales, 3% to 7% comps growth, and a 20% to 25% increase in earnings, it reminded investors that the first half of fiscal 2007 is going to be a tough comparison and therefore "more challenging" than the second half.

I'm a Starbucks shareholder and optimistic on the company's long-term picture. I like its growth plans, and I think it's a well-run company, so I have no intention of running for the hills. However, while it's good that Starbucks hasn't changed its thoughts on next year's growth goals, let's just say there might be some "interesting" months ahead that may try all but the staunchest of long-term Starbucks shareholders.

For related Foolishness, see the following articles:

Starbucks is aMotley Fool Stock Advisorrecommendation. To find out what other companies David and Tom Gardner have recommended to subscribers, check out a 30-day free trial.

Alyce Lomax owns shares of Starbucks. The Fool has a disclosure policy.


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