When the going gets tough, the weak go outsourcing. That may not be the story most mainstream press outlets are reporting about Starbucks' (Nasdaq: SBUX ) Wednesday evening news -- but it's the one that jumps out at me today. I'll tell you why in a moment, but first let's review:
The bad ...
The bad news here was all in the headlines. Sales for the second quarter dropped 7.6%. Profit of just $0.03 a share amounted to an 80% drop from the second quarter of 2008. In the first half of fiscal 2009, Starbucks has earned a piddling $89.3 million, netting 72% less profit than it earned in the comparable 2008 period.
These results stand in stark -- and unflattering -- contrast to what we saw at homebrew-meister Green Mountain Coffee Roasters (Nasdaq: GMCR ) this week. With sales of Keurig coffeemakers roaring, and Wal-Mart Stores (NYSE: WMT ) lending its marketing muscle to increase distribution, the Motley Fool Rule Breakers recommendation blew Wall Street expectations right outta da percolator yesterday. Read all about it in Rick Munarriz's write-up.
The good ...
Dig a little deeper, though, and there's some cause for hope among Starbucks shareholders. Free cash flow has amounted to $460.8 million so far this year, up from just $268 million by this time last year. The reason? Lower capital expenditures, as Starbucks ratcheted its expansion plans way back.
If it keeps this up, Starbucks should be on course to produce some $920 million this year, a number that would have the stock trading now at a little north of 11 times free cash flow. With most analysts agreeing that earnings will grow at about 16% per year for the next half-decade, that makes the shares look mighty tasty, value-wise.
This news, plus bullish analyst comments from William Blair and Deutsche Bank -- both of whom praised Starbucks for its cost-cutting, helped send the shares up 5.6% yesterday but they've given back almost 4% of those gains today.
And the hog-ugly
Which brings us, finally, to what I think is most interesting about the Starbucks' story: franchising. Starbucks' cost-cutting campaign consists in large part of closing underperforming stores. Management currently expects to shut down a net of 365 company-owned stores this fiscal year. In contrast, 385 new "licensed" stores will open.
With this netting out to a 20-store increase companywide, Wall Street calls this "slower growth," and approves of the concept. What I see here, though, is Starbucks following in the franchise footsteps of Tim Hortons' (NYSE: THI ) and Buffalo Wild Wings (Nasdaq: BWLD ) -- and on a less successful note, of Krispy Kreme (NYSE: KKD ) -- transitioning from its historically company-owned focus and evolving into more of a franchise-based operation.
So far it seems to be working to reduce costs and boost cash flow. Will it continue to work? Stay tuned.
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