This week was a BUSY BONANZA for Rule Breakers, as Amazon, Amgen, Celera, eBay, and Starbucks announced quarterly results. Starbucks (Nasdaq: SBUX) was the most recent to bare its soul to the public. With nearly 2,900 worldwide stores, as well as product for sale in grocery stores, hotels, airplanes, and offices, the company reported second-quarter revenue of $505 million, up 34% from last year, and earnings of $23.4 million, up 30%. Same-store sales rose a hefty 10%.
These numbers were strong, so why did the stock fall over 15% on Friday? I spoke with Bob Fredeen, our Fool Analyst who follows Starbucks as closely as NASA follows cloud formations before a shuttle launch (Bob's in-depth quarterly Starbucks report will be available from Motley Fool Research soon). Bob believes that part of the decline was oddly due to the strong results. It is unlikely that same-store sales will be able to rise 10% again anytime soon. For a few reasons, 5% to 6% is more likely. The fact that operating margins fell two percentage points, to 34%, also arguably played a role in the stock's decline.
The decline in operating margins in North America is in large part due to increased labor costs, something that Bob foresaw last month in his initial Fool Research report on Starbucks. With the economy humming, Starbucks must pay more to attract and retain its wage-earning employees. Operating margins also dropped because Starbucks is spending more for future growth. The company is staffing its United Kingdom offices not only to serve its pending few hundred U.K. store locations, but its hundreds of other locations that will open across the continent of Europe, too.
With this knowledge in-hand, some investors believe that the drop in operating margins overseas was a good sign. It is a sign that Starbucks is spending enough to grow aggressively. This quarter, Starbucks opened 215 new stores, more than any other quarter in its history, and yet its cash balance remained steady at around $130 million (current operations continue to fund growth). Starbucks also increased its new store opening goal for the rest of the year. The company aims to open about 75% more licensed stores this year than it previously intended, making 350 total licensed stores, with 200 being international. Overall, Starbucks should open 750 new stores this year, up from a previous goal of 600.
So, again, why the drop in the stock?
Overall, it's believed that the stock declined because some investors think that earnings will be threatened this year by the company's increasingly aggressive expansion plans, which adds to operating costs. Also, difficult year-over-year comparisons will now play a role in limiting growth rates. These are short-term concerns, however. Given the company's dominance of the quality coffee market in the United States, and given the company's quick traction in the United Kingdom and in the Far East, what we're seeing here (I think) is a company on the verge of becoming the next great worldwide consumer beverage brand. This long-term possibility is much more important than the next two quarters' earnings results.
Great risk remains, but Starbucks has defined and then protected its brand like Mama Bear protects her cubs, and the company has been transplanting its brand adroitly around the world. With visionary CEO Howard Schultz taking the reins regarding international expansion starting June 1 (because a mother lode of growth remains overseas), the cards seem stacked in Starbucks' favor. As investors, we hope that some year we can say, "We bought Starbucks when it was mainly a U.S. operation with 1,700 stores way back in 1998. Now, with 20,000 stores, almost all the world knows Starbucks means great coffee!"
In its conference call, Starbucks shared that it'll roll out new products soon in what has become a yearly summer ritual. Two new products revolve around the popular Mocha Frappuccino blended drink. A Mocha Frappuccino Brownie (which is the original drink but with brownie in it) will debut, as will a Mocha Frappuccino Orange (sounds refreshing). In tandem, the company will launch a card loyalty program for regular blended-drink purchasers. Also, Starbucks is expanding its lunch offering to more stores (400 stores by fiscal year-end) and it will open its first store in Australia, too. Starbucks may eventually have 300 stores on the continent alone.
Success always comes at a price. At $30 per share, Starbucks trades at 42 times expected earnings for this fiscal year, which ends in September. The stock trades at 33 times next year's expectations. Given the company's 30% earnings growth rate and assuming 2001 estimates are met, today's share price seems reasonable in my opinion (I don't own shares personally, however).
Meanwhile, as has been the case in the past year with Starbucks, a share price in the mid or especially the low $20s would likely provide a good opportunity, all else being equal, to buy a high-quality company at a promising price for long-term appreciation.
Other Quarterly Results
Below are the sales and operating results of all of our companies that reported earnings this week. David and Paul discussed Amazon.com (Nasdaq: AMZN) on Wednesday and Thursday (linked below) and they liked what they saw. eBay (Nasdaq: EBAY) is clicking ahead impressively, too. Only Amgen (Nasdaq: AMGN) concerned me with its single-digit growth and without a major new drug about to start selling this quarter. However, Amgen has four new products nearing potential commercialization, so the company is a great long-term keeper -- for us.
The links in the company names below bring you to each companies' recent quarterly press release. The numbers show last quarter's revenue, as reported this week, the year-over-year growth of that revenue, and the gross margin (what is left after the cost of goods sold is subtracted from sales). The second table shows operating income, the change from last year in this number, and the operating margin (what is left after cost of goods sold and all operating costs are deducted).
Last Qtr. Y-over-Y Gross Company Revenue Change Margin Amazon $574M 95% 22.3% Amgen $814M 9% 89.4% Celera $11M 516% NA eBay $86M 100% 72.8% Starbucks $505M 34% 55.7% Last Qtr. Y-over-Y Operating Company Oper. Inc. Change Margin Amazon ($99M) NA NA Amgen $352M 7% 43.2% Celera ($43M) NA NA eBay $452,000 NA NA Starbucks $35M 34% 6.9%
Finally, Celera (NYSE: CRA) bounced on Friday without news. To discuss any of these companies with other Fools, visit each company's respective discussion board, or visit the Rule Breaker Companies board linked below. Have a great weekend. Fool on!
-- Jeff Fischer, TMF Jeff on the boards.