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Starbucks Comps on Caffeine High

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By Matt Richey (TMF Matt)
August 1, 2003

Starbucks (Nasdaq: SBUX) is one of those companies that if you don't own it, you wish to heaven it would have just one bad month of sales to knock the share price down to a more palatable amount. But just the opposite keeps happening. Case in point, last night, the company announced yet another stellar monthly sales report.

For the four weeks ended July 27, sales at the world's largest coffee purveyor increased 23% to $322 million. Most impressively, Starbucks reported 9% comp store sales growth, continuing a string of high-single-digit monthly comp growth performances that have persisted all year.

Last week, in Starbucks' third-quarter earnings release, the company said to expect comp store sales to be "at or above the high end of the 3%-7% target range for the remainder of the year." So, at 9%, July's growth was meaningfully above official expectations.

So what's driving sales, you ask? Our best guess is the new malt-flavored Frappuccinos (our recommendation: the Mocha Malt). In all seriousness, the highly successful Starbucks card may be partly responsible. Whatever the catalyst is, it's not higher prices (as you might expect). Management made a point in last week's earnings release of saying that comp store sales are rising on the strength of increased store traffic, plain and simple.

But don't be surprised if the market's reaction today is only modestly enthusiastic. Starbucks is practically a victim of its own success considering that this high level of comp growth has been so persistent for so long. Since January 2002, Starbucks' monthly comps have increased at a rate no less than 6%.

This consistent operational growth has finally, of late, pushed Starbucks shares to an all-time high of $27.77. At that price, the company is valued at $11.1 billion, or 41 times expected current fiscal year (ending in September) EPS of $0.67. That price appears pretty fully valued, but then again, Starbucks has often looked that way over the years.

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