Starbucks' Siren Song

Starbucks' (Nasdaq: SBUX  ) second-quarter results poured a cup of reassuring news for investors. For a long while, Starbucks has suffered malaise because of recessionary conditions and its own overexpansion. Its quarterly results imply that American customers are queuing up for its gourmet coffee in greater numbers than they have in quite some time.

Second-quarter net income skyrocketed 769%, to $217.3 million, or $0.28 per share. Last year's second-quarter results included a heaping helping of restructuring charges, mind you, so the gaudy number is accurate but somewhat misleading. Revenue increased 8.6%, to $2.53 billion, while comps climbed 7%.

Starbucks has needed to get customers back in the door in greater numbers, so here's good news: U.S. comps increased 7%, driven not only by a 5% increase in the average bill, but also a 3% increase in traffic.

Starbucks fans might say, "Take that, McDonald's (NYSE: MCD  ) ." McDonald's most recent quarterly results were boosted by a fancy beverage component, its McCafe drinks, but it looks like that's not taking too much momentum out of Starbucks' recovery.

Starbucks also touted the potential of new products like its instant coffee offering, Via, which will help it compete with brew-at-home rivals like Green Mountain Coffee Roasters (Nasdaq: GMCR  ) and its one-cup Keurig coffee brewer. In fact, Starbucks plans to step up marketing of Via massively, devoting a majority of its marketing budget in the next months to promote the instant coffee and its line of Frappucino drinks in supermarkets, according to the Financial Times. That would move the company into more obvious competition with Smucker's (NYSE: SJM  ) Folgers and other store-based coffees.

These heartening numbers give some credence to the idea that a lot of folks are partaking of luxuries once again. Coach's (NYSE: COH  ) recent results offered a similar implication, and bode well for discretionary spending going forward.

Of course, Starbucks is eyeing international growth, too, including greater expansion in China, a popular target for other American companies like McDonald's and Yum! Brands (NYSE: YUM  ) . International expansion is important for the coffee giant, given its overexpansion here in the U.S.

There's plenty of heartening news in Starbucks' quarterly results, even if they're a far cry from the crazy, caffeinated growth of long-ago yesteryears. Of course, Starbucks shares are up more than 100% in the last year, and its double-digit price-to-earnings multiple is starting to feel awfully reminiscent of headier days when it clocked in much higher growth in revenue and profits. Should investors cool their ardor for Starbucks? Let us know in the comments boxes below.

Coach and Starbucks are Motley Fool Stock Advisor recommendations. Green Mountain Coffee Roasters is a Rule Breakers pick. Try any of our Foolish newsletters free for 30 days.

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


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  • Report this Comment On April 22, 2010, at 8:58 PM, Varchild2008 wrote:

    STARBUCKS instant is absolutely wonderful and I do see myself buying some more packages of the stuff.

  • Report this Comment On April 23, 2010, at 3:56 PM, TMFLomax wrote:

    Varchild2008,

    I picked on them when I first heard about the instant coffee and now I am hooked on VIA for the weekends (when I don't stop at SBUX on my way to work), ha. It is very good!

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