Please ensure Javascript is enabled for purposes of website accessibility

Inflation Nips Starbucks in the Bean

By Alyce Lomax – Updated Apr 6, 2017 at 10:46PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The coffee giant's rising costs will squeeze its customers, too.

Commodity-price inflation has been in the news lately, and Starbucks (Nasdaq: SBUX) isn't immune to its effects. Rising costs have forced Starbucks to cut its earnings forecast and passing on price hikes to customers. Despite those developments, the coffee giant also had good news to share.

Starbucks' first-quarter net income increased 43.5%, to $346.6 million, or $0.45 per share. Sales increased 6.9%, to $2.45 billion, and same-store sales surged 7%. The difficult U.S. market didn't prove too challenging for Starbucks, with comps increasing a hefty 8%, accompanied a 6% increase in traffic and a 2% increase in average ticket.

Foreign sales weren't too shabby, either, with comps increasing 5% and a 2% uptick in both traffic and average ticket.

Rising commodity prices may begin to constrain profits at companies that peddle food and beverages. McDonald's (NYSE: MCD) plans to raise prices on some items because of these escalating costs, and Smithfield Foods (NYSE: SFD) and Tyson (NYSE: TSN) were both recently downgraded amid surging feed prices for livestock. They're not the only ones getting stung by higher inflation.

Starbucks isn't immune from these factors. The coffee giant moderated its earnings guidance; citing rising costs for coffee and other commodities, it now expects earnings of $0.32 to $0.33 per share in the second and third quarters. Starbucks will also selectively raise prices in some markets. But the company did reaffirm its yearly guidance.

Last summer, companies like Kraft (NYSE: KFT) and J.M. Smucker (NYSE: SJM) revealed that they would raise prices on coffee. While Starbucks said then that it would absorb higher coffee costs, it's now joined the price-hiking gang.

On a less ominous note, Starbucks management cited the successful holiday season and continued popularity of its Via instant coffee product; its Christmas blend Via even sold out several weeks before the holiday for which it was named.

Consumers may already notice that the prices of many items are going up, so it's possible that any price hikes at Starbucks will just seem like more of the same, provided the company proceeds with caution. Starbucks risks giving its customers a case of sticker shock if prices jump too high, too quickly.

Overall, Starbucks' first-quarter results present little reason to sell. However, the coming months could make for tricky navigation for Starbucks, and prospective investors may want to wait and see whether a better bargain on the shares, which trade at 23 times earnings, might be forthcoming.

Starbucks is a Motley Fool Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax owns shares of Starbucks. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kraft Foods Group, Inc. Stock Quote
Kraft Foods Group, Inc.
KRFT.DL
Tyson Foods, Inc. Stock Quote
Tyson Foods, Inc.
TSN
$69.94 (-1.51%) $-1.07
Starbucks Corporation Stock Quote
Starbucks Corporation
SBUX
$84.17 (-0.63%) $0.53
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$245.95 (-0.80%) $-1.99
The J. M. Smucker Company Stock Quote
The J. M. Smucker Company
SJM
$140.65 (-0.97%) $-1.38

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.