Is Starbucks Getting Watered Down?

Starbucks' (Nasdaq: SBUX  ) first-quarter earnings hit a high note on many metrics, but its margins took a hit as commodity price pressures continue to be an issue. However, investors should refrain from cutting this twist on the caffeine habit from their portfolios.

First-quarter net income increased 10% to $382.1 million, or $0.50 per share. Total revenues increased 16.4% to $3.44 billion. Global same-store sales perked an impressive 9% higher, with a 7% traffic boost and a 2% jump in their average ticket.

If investors must search for something to fret about, it would be Starbucks' margins. Quarterly operating margin fell to 16.2% from 17% this time last year. The 80-basis-point decrease is attributed to the high price of commodities, particularly coffee.

On the other hand, Starbucks' recent partnership with Green Mountain Coffee Roasters (Nasdaq: GMCR  ) is alive and kicking pretty hard; Starbucks said it shipped more than 100 million Starbucks- and Tazo-branded K-Cups in the first quarter, helping drive its consumer product group sector's revenue 72% higher.

In addition, Starbucks' international expansion is progressing. The coffee giant has opened 241 new stores across the world, reaching 500 stores in China and Latin America.

Apparently a theme is popping up amongst food- and beverage-related companies like Starbucks. Quarterly resultsfor McDonald's (NYSE: MCD  ) earlier this week didn't exactly thrill investors, and lower margins also cast a shadow over an otherwise good quarter.

Although Starbucks hit a new 52-week high recently, it's still cheaper than some coffee peers. Starbucks' PEG ratio of 1.48 compares quite favorably to Peet's (Nasdaq: PEET  ) PEG ratio of 2.14 and Caribou's (Nasdaq: CBOU  ) PEG ratio of 1.74. Plus, Starbucks' growth plans, including its Evolution Fresh acquisition, give investors good reason to believe in heady future growth.

In September, I purchased shares of Starbucks for the real-money Rising Star portfolio I'm managing for Fool.com, and I'm pleased with its performance so far, and potential investors could view today's weakness as a good buying opportunity. Starbucks remains a solid stock for the long haul.

Starbucks had a huge quarter, but there are plenty of other companies out there that investors need to watch during this earnings season. In the Fool's "Fourth-Quarter Earnings Report: 7 Stocks You'll Want to Watch," you'll find information on this quarter's possible big performers. It's completely free for our readers, so click here to access your free report today.

Alyce Lomax owns shares of Starbucks in her personal portfolio. The Motley Fool owns shares of Starbucks. Motley Fool newsletter services have recommended buying shares of Starbucks, Green Mountain Coffee Roasters, and McDonald's. Motley Fool newsletter services have recommended creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. 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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