Last night, coffee purveyor Starbucks (Nasdaq: SBUX) announced that comparable-store sales growth at stores open at least 13 months increased 7% for the month of May. Starbucks' comparable-sales press releases have piqued my interest of late, because it was only a few months ago that a 7% increase in comps had some worried that the business was falling off a cliff.
So far at least, this latest comps increase is getting an entirely different response than it would have garnered just five months ago. Instead of panic, there is relative tranquility -- which really is how it should be.
Whether it's Starbucks, Urban Outfitters (Nasdaq: URBN), Outback (NYSE: OSI), or any other retail business, it's foolish (small f) to buy or sell any company's shares based on one month's data. Particularly when that data represents just one line on the income statement. This does not mean same-store sales are not important. They are, but not when you're only considering one month.
As long-term investors, we're far better off focusing on the strength of a retailer's balance sheet in relation to its income statement and its free cash flow in relation to net income. As a general rule, fast-growing retailers with solid balance sheets tend to live longer than those that play it close to the edge. Another general rule is that the younger a retailer is, the less likely it is that there will be any free cash flow available.
To that point, I made the mistake a couple of weeks ago of lumping Starbucks in with a couple of other young retailers that have solid balance sheets, but lack free cash flow. An employee at Starbucks was kind enough to shoot me a note and point out my oversight. First, let me say that there's nothing wrong with such a scenario. Often, young businesses are expanding so quickly that what would be free cash flow is spent opening new stores, which in turn should fuel greater free cash flow in the future.
However, such a characterization does not accurately reflect the picture at Starbucks for the last few years. Starbucks is very much free cash flow positive. The fact that Starbucks opens over 1,000 stores a year and is still free cash flow positive is impressive.
All this impressive performance comes at a price. I can't say I'd recommend buying shares at today's prices, but it's not like these shares go on sale often. But when Starbucks shares do swoon, and it does happen on occasion, that's the time to get interested and really dig into the Starbucks story to see if it's still a solid investment.
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Nathan Parmelee owns shares in Starbucks, but has no financial interest in any of the other companies mentioned.
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