Inflation Nips Starbucks in the Bean

Commodity-price inflation has been in the news lately, and Starbucks (Nasdaq: SBUX  ) isn't immune to its effects. Rising costs have forced Starbucks to cut its earnings forecast and passing on price hikes to customers. Despite those developments, the coffee giant also had good news to share.

Starbucks' first-quarter net income increased 43.5%, to $346.6 million, or $0.45 per share. Sales increased 6.9%, to $2.45 billion, and same-store sales surged 7%. The difficult U.S. market didn't prove too challenging for Starbucks, with comps increasing a hefty 8%, accompanied a 6% increase in traffic and a 2% increase in average ticket.

Foreign sales weren't too shabby, either, with comps increasing 5% and a 2% uptick in both traffic and average ticket.

Rising commodity prices may begin to constrain profits at companies that peddle food and beverages. McDonald's (NYSE: MCD  ) plans to raise prices on some items because of these escalating costs, and Smithfield Foods (NYSE: SFD  ) and Tyson (NYSE: TSN  ) were both recently downgraded amid surging feed prices for livestock. They're not the only ones getting stung by higher inflation.

Starbucks isn't immune from these factors. The coffee giant moderated its earnings guidance; citing rising costs for coffee and other commodities, it now expects earnings of $0.32 to $0.33 per share in the second and third quarters. Starbucks will also selectively raise prices in some markets. But the company did reaffirm its yearly guidance.

Last summer, companies like Kraft (NYSE: KFT  ) and J.M. Smucker (NYSE: SJM  ) revealed that they would raise prices on coffee. While Starbucks said then that it would absorb higher coffee costs, it's now joined the price-hiking gang.

On a less ominous note, Starbucks management cited the successful holiday season and continued popularity of its Via instant coffee product; its Christmas blend Via even sold out several weeks before the holiday for which it was named.

Consumers may already notice that the prices of many items are going up, so it's possible that any price hikes at Starbucks will just seem like more of the same, provided the company proceeds with caution. Starbucks risks giving its customers a case of sticker shock if prices jump too high, too quickly.

Overall, Starbucks' first-quarter results present little reason to sell. However, the coming months could make for tricky navigation for Starbucks, and prospective investors may want to wait and see whether a better bargain on the shares, which trade at 23 times earnings, might be forthcoming.

Starbucks is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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