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Starbucks (Nasdaq: SBUX) reported its second-quarter results yesterday. It got a 24% bump in revenues on 6% comparable-store sales, or comps. Net earnings increased 38% to $32 million, or $0.16 a share, just like Wall Street wanted. Something went wrong, though. After the numbers came out, the stock got whacked down 10%.
What happened? It seemed like the numbers were good. The problem had to be the dreaded forward guidance. Starbucks plans to open more stores than previously expected (1,200 instead of 1,100), but it sees comps falling into the "low single digits, with monthly anomalies," for the rest of fiscal 2001. Accordingly, total revenue growth targets shifted lower, from 25% growth to 23-25% growth.
Big difference, no? This is called managing expectations. Say it with me, kids: managing expectations. And for that, the stock gets spanked. I didn't see anything else notably bad in the results, unless you think of 6% comps as bad. I sure don't. It brings comps to 8% for the year. If we get low single digits in the second half, we'll end the year at something like 5% comps. That's below the level Starbucks recorded last year, but it's about average for Starbucks over the last five years.
I have no problem with the stock dropping -- well, it's a bit of a concern, because Starbucks insists on doing a ridiculous 2:1 stock split on Monday. (Why, why, for the love of Pete, split a $40 stock that is, shall we say, already generously priced? It's a recipe for trouble.) What kills me is that investors apparently needed Starbucks to manage their expectations. It implies that stockholders actually thought Starbucks could continue to record double-digit comps forever. It couldn't, no matter how well it performed.
C'mon, people. We should have learned last year that current growth rates are not permanent. Starbucks will be just fine, but don't expect it to increase comps 10% per year. That's an amazing rate. It had to slow. We have said so several times in this space. Not that all investors should be intimately familiar with our commentary, but they should at least think a little ahead of the curve.
I'm not talking about a lot here. I'm not suggesting that we should all have "visibility" out five years, like Meg Whitman feels she does at eBay (Nasdaq: EBAY). In fact, it's essentially the same problem. The notion there is that the growth will not only continue at the current rate, but will accelerate as the company gets into new areas.
It may well be true, but it won't happen according to formula. It won't happen at 50% growth per quarter. There will be bumps and jags and lumpiness, which may or may not end up at an average rate of 50%. Investors should realize that growth isn't linear. Nevertheless, mark my words: If eBay has a year where it grows only 30%, the Street will get nervous and jump ship. That's not the way to look at it.
It's like chess. People often imagine that the great players think 10 or more moves ahead, but they don't. Someone asked Bobby Fischer once how many moves he thought ahead, and he said a maximum of four. He may have a formula to start, and he certainly positions himself for the future by, for example, trying to gain influence in the center of the board -- general strategy stuff -- but he doesn't know exactly how it will play out. Every move brings a new set of options. Unexpected things happen. A good player adjusts to the new circumstances. She may want to continue with the plan, or she may have to rethink it.
So it should be with investors. Prepare a general strategy for yourself and pursue it. That doesn't mean that you shouldn't look ahead a couple of moves to what's coming up. You can see some things coming, like slowing comps at Starbucks after a year in which they were spectacularly high. You don't need a company to tell you about that. Often, too, it doesn't change your general strategy. It simply prepares you for what's to come.
I didn't see anything in Starbucks' report that makes me worry about our long-term vision of the company. This year's growth will probably be slower than last, but it won't be significantly slower than expected. On the other hand, specialty sales (which include sales to wholesale accounts and licensees, royalty and license fee income, and sales through its direct-to-consumer business and its online store) increased 37%. It now represents 17% of revenue, up from 15% last year. That's good, since it is higher-margin revenue. Correspondingly, gross margins rose to 57% from 54.5% a year ago. Good news.
Buying and selling on shifting growth rates is a sucker's game. Maybe -- maybe -- some traders can profit from actively moving in and out of stocks as they move, but precious few ordinary investors can. Don't fall into the trap.
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All three of our biotech holdings reported quarterly earnings this week. Most notable are results for the only profitable one in the bunch, Amgen (Nasdaq: AMGN). The biotech drug maker announced a 14% increase in total revenues over Q1 last year, with EPS up 12% from $0.25 to $0.28. Though the company lowered 2001 EPS growth projections from the mid-teens to low-double digits, CEO Kevin Sharer stuck by long-term estimates of compound annual sales and EPS growth in the low 20s from 2001-2005, and sales between $8 billion and $9 billion in 2005. Tom Jacobs will have more on Amgen for Monday's column.
Brian Lund forages for stray coffee beans on the floor at Starbucks as a form of supplementary income. He then buries the proceeds in his backyard. He owns stock in eBay and spends more than he should annually at Starbucks. The Motley Fool is investors writing for investors.
