Jittery Investors Spit Out Starbucks

Starbucks (Nasdaq: SBUX  ) poured a strong cup of quarterly earnings, but judging from the first hours of trading, many investors didn't care for the flavor.

Third-quarter net income increased 37.2%, to $207.9 million, or $0.27 per share. Revenue jumped 8.6%, to $2.19 billion. Same-store sales also showed admirable improvement, surging 9%. Starbucks reversed last quarter's situation, when pricier transactions, not more customers in the stores, boosted comps. Third-quarter comps reflected a 6% increase in traffic and a 3% increase in the average ticket, suggesting that customer traffic is heading in the right direction.

Starbucks showed a great deal of improvement here in the U.S., where comps increased 9% on a 6% increase in traffic and a 3% jump in the average ticket. That's heartening, especially given all the shaky consumer spending elsewhere in the retail sphere.

All this also comes despite heated competition from McDonald's (NYSE: MCD  ) , Green Mountain Coffee Roasters (Nasdaq: GMCR  ) , Caribou (Nasdaq: CBOU  ) , and Peet's (Nasdaq: PEET  ) . I'd call the quarterly tidings a pretty major success, really.

Starbucks also continues to discuss its much-vaunted Chinese expansion, and so far, it sounds like all's well there. On the conference call, CEO Howard Schultz revealed that comps in Chinese stores surged by double-digit percentage points, which sounds like good news for the company's long-term plan for China.

Via instant coffee is also still a growth driver, and Starbucks said the powdered brew successfully launched it into grocery stores in the U.S. In May, we learned that Starbucks planned to offer it in high-traffic venues like CVS (NYSE: CVS  ) and Costco (Nasdaq: COST  ) . The company now plans a similar rollout in the U.K. and Japan.

Starbucks sweetened the cup by boosting its quarterly dividend by 30%, to $0.13 per share, and repurchasing 6.7 million shares in the third quarter.  

At 18, Starbucks' forward price-to-earnings ratio looks pricey compared to, say, McDonald's forward P/E of 15. Then again, it's cheaper than Peet's, at 25 times earnings, or Green Mountain's, at 29 times earnings. Meanwhile, the recent quarter implies that maybe Starbucks is doing a good job of reinventing itself, which would bode well for the potential of future growth.

What do you think? Does it really make sense to spurn shares of Starbucks now? Let us know in the comment box below.

Starbucks and Costco are Motley Fool Stock Advisor recommendations. Costco is also a Motley Fool Inside Value recommendation. Green Mountain is a Motley Fool Rule Breakers pick. The Fool owns shares of Costco. 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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