I was a bit worried last night when I saw Starbucks' (Nasdaq: SBUX ) quarterly earnings press-release headline, which touted third-quarter revenues. Just plain old revenues.
Uh-oh, I thought. What happened to the word "record"? Starbucks followers have come to expect record earnings reports each and every quarter. Kind of like in Invasion of the Body Snatchers, this looks like Starbucks and sounds like Starbucks, but it's not exactly the Starbucks we used to know.
Indeed, investors were treated to a fairly rare occurrence for this company -- a mere single-digit increase in quarterly profit. Starbucks' net income increased 9% to $158.3 million, or $0.21 per share. The company did post double-digit growth of 20% in sales by bringing in $2.4 billion in revenue. And while the 4% comps weren't anything spectacular, they were within the realm of the company's targeted 3% to 7% increase in comps.
Anybody who's followed Starbucks for a while knows that Wall Street sometimes goes nuts over any sign of weak comps, even if they are within the company's guided range. But if nobody freaked this time, it's probably because the negative sentiment has been pretty palpable recently -- and maybe some people simply expected worse.
Of course, it's hard to brush off the haters too much, because these really aren't the types of figures that longtime Starbucks investors are accustomed to. Conversations with my Foolish colleagues have stirred up a lot of questions, too. These days, the competition in the market is becoming more fierce as competitors fight to lure customers away from Starbucks. It's hard not to wonder whether breakneck growth finally started to wear thin after driving by places such as Caribou (Nasdaq: CBOU ) , and McDonald's (NYSE: MCD ) that are becoming more crowded with java lovers. I even recently discovered that my fellow colleague Nate Parmelee has become "one of the problems" Starbucks faces -- he now stops at Dunkin' Donuts for his morning brew. And not only am I concerned that other coffee destinations are stealing Starbucks' customers, but I also worry that the company is finally feeling the effects from cannibalizing existing stores.
The company is stepping up the openings of franchised stores -- which are a quick, cheap, and easy way to grow into popular places such as airports and highway rest stops, but they could also cheapen the brand. Plus, after China recently decided to forbid Starbucks in the Forbidden City, is the company's huge global success really a given, when weighing the realities of the cultures themselves?
Starbucks' growth is slowing -- management now says to expect top-line growth of 18% and bottom-line growth of 20% to 22% at least for 2008, as opposed to the old goals for 20% on the top and 25% on the bottom. Management did say in the conference call that while 25% profit growth isn't out of the question in the future, it also isn't reasonable to plan on it consistently over a number of years unless there is a transformation in the business. In fact, CFO Michael Casey said the 25%-growth goal might have "put more strain on the system than we needed to" -- a view that does seem to relate to some people's fears that growing too quickly is a big risk for Starbucks. Let's not fly off the handle, though: Those are still the kinds of double-digit growth increases many companies would envy. But it's certainly food for thought.
I lean more positive than negative on Starbucks. There's a lot I like, not the least of which is the potential in its international expansion -- international revenues did increase by 28% in the quarter. The company may be at a crossroads now, but perhaps the short-term angst is merely that. It's also certainly trading at much less than the premium prices it used to command -- its price-to-earnings ratio of 35 may sound pricey on the face of it, but that figure is near its five-year low P/E. And in addition to a continuation of projected double-digit growth rates, Starbucks also expects margin improvement in 2008 after this costly year.
I think it's a good time to consider Starbucks, but as always, investors should weigh all of the elements with a critical eye. Starbucks' falling stock price this year does reflect increased uncertainty that may indeed be overblown, but I can't deny that the bearish types have some excellent points to make about the risks at hand.
For related Foolishness, check out the following articles:
- Starbucks raised prices just a few days ago.
- Check out Starbucks' presentation at a Wall Street conference.
- Here's our coverage of Starbucks' last quarter.