To many investors, it now seems that the once-infallible Starbucks (NASDAQ:SBUX) can't do anything right. Its latest stumble, revealed at a recent William Blair conference: The coffee giant confessed that it'd be "challenging" to meet the high end of its annual guidance. Amid all kinds of investor hand-wringing, Starbucks' shares have fallen yet again.
Starbucks' CFO Michael Casey commented that it won't be easy to make the high end of this year's $0.87-to-$0.89-per-share guidance, given rising dairy prices and soft transaction growth in Starbucks' U.S. business. I can't really blame some investors for wondering whether Starbucks has reached a much-dreaded saturation point. With high-profile efforts by rivals as diverse as McDonald's (NYSE:MCD), Dunkin' Donuts, and Caribou Coffee (NASDAQ:CBOU) to pry business away from Starbucks, it's easy to understand why some investors fear the impending end of the coffee chain's glory days.
Growth is still on the menu
Casey stated that the coffee giant still plans to double the size of its business over the next four to five years. It's shooting for an ultimate potential of 40,000 stores, or three times the current number. However, although Starbucks still aims to open 200 more stores than the year before, Casey said that growth-rate increase has slowed down a bit, at 19% versus the previous two years' 21%. Of the 2,400 new stores Starbucks will debut this year, 1,700 will appear here in the U.S., while 700 will open abroad.
Casey also noted that Starbucks bought just 2% of the 15 billion pounds of coffee the world produces annually. It currently only accounts for an identical 2% of worldwide coffee consumption -- 7% domestically, and 1% in the rest of the world. Casey highlighted these facts to emphasize Starbucks' considerable potential to further grow its market share.
The company continues to increase its complementary offerings. It's expanding its lunch offerings and ability to serve hot foods throughout its stores. Lunch is offered in 4,800 stores as of the second quarter of fiscal 2007, with Starbucks' selection expanding by three to five new salads next week; Casey said lunch represents $30,000 in annual sales to each store that serves it. About 1,700 stores now offer warm breakfast sandwiches as well, and that program contributes $35,000 in incremental annual revenue per store.
Starbucks plans to enhance the factors that help it stand out from the java-slinging crowd -- especially its media offerings. Casey noted once again that the new Paul McCartney album from Starbucks' Hear Music label, Memory Almost Full, debuted at No. 3 on Billboard, and that Starbucks accounted for nearly half of the 167,000 copies the album sold in its first week. Sir Paul's latest success doesn't mean that Starbucks will consistently generate smash hits, of course. If it does, I'm personally hoping they're always appropriate, high-quality musical offerings that don't cheapen the brand.
Short's not on the menu, but you can get it anyway
Starbucks still stands by the idea that it has venti-sized growth on the way, expanding both here and in important markets abroad. All the same, investors seem worried that the future might more closely resemble Starbucks' legendary, unadvertised-but-available "short" cappuccino.
High costs for dairy products may be a short-term concern hitting many companies in the industry. While coffee purchasing has considerable visibility due to Starbucks' fixed-price contracts, Casey said, dairy is highly regulated and difficult to hedge.
Starbucks' soft U.S. transactions are an even more ominous sign of weakness. In addition to consumers' abundant options for a coffee break, Starbucks' forays into breakfast and lunch mean it's also vying for hungry patrons with a great many competitors.
The company's growth story hasn't changed. It's still got great opportunity ahead, especially internationally, and as a shareholder, I know I'm hanging on for the long term. However, I can see why some might consider the shares too pricey right now, even with recent weakness. The stock still trades at 33 times trailing earnings, and the company faces plenty of short-term challenges.
Starbucks has historically traded at high multiples, but that's not always a good thing. Its current woes show how heavily such high-flying stocks can bear the brunt of investors' discontent when their business appears to be merely good, rather than great.
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- Longtime Fool Rick Munarriz recently studied Starbucks' quarterly earnings.
- Here's a Starbucks Fool on the Street offering from March.
- Has Starbucks lost its soul? Investors want to know.
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Alyce Lomax owns shares of Starbucks. The Fool's disclosure policy takes its coffee black.
