Success can be boring. Just look at the predictability of Starbucks'
Before we dive into the results, investors should collectively congratulate Starbucks for adopting stock options expensing (FAS 123R) without making investors sort through a raft of pro forma numbers or restatements of prior results. It may depress results this year, but I firmly believe in letting investors make their own adjustments to GAAP numbers.
Starbucks' first-quarter revenue growth came in at 22%; net income was 20% higher, and earnings per share (EPS) came in 29% higher, at $0.22 per share versus last year's $0.17. Same-store sales were up 7% for the quarter, and in January (the first month of Starbucks' Q2), same-store sales were up 10%.
The numbers from October forward are a bit more impressive. As CFO Michael Casey stated on the conference call, "The comparable-store sales growth of 7% is particularly satisfying, given that in October, we lapped the October 2004 beverage-price increase in our U.S. and Canadian markets." The company also raised its EPS expectations for fiscal 2006 by a nickel, to a new range of $0.68 to $0.70.
After listening to the conference call, it's clear that Starbucks is gearing up to extract the bulk of its future growth from international operations. This is particularly true in China, where the company will be spending some extra cash in the second half of the year to build out the operational base necessary to support a larger store count. I have been privately skeptical about the company's chances in China, but so far, the company is doing well, and it believes there is an opportunity for plenty of growth in the market.
The other item of interest is the company's continued expansion of entertainment offerings. First Starbucks was selling unique compilation CDs in its stores, then offering a 24-hour music channel on XM Satellite Radio
With all this good news at once, it's no surprise that Starbucks' stock has climbed today. But in the past, such positive tidings have also led investors to price more and more optimism into the shares' future. Of course, this only leads to inevitable disappointment when the company merely meets its stated goals. As much as I like Starbucks and admire what the company has done, I would caution against starting a large position here. At the current price of $34.70, the stock sits at the high end of what I consider it to be worth. A bit of patience should allow the stock to sink back to a more reasonable price.
Every year or two, investors get worried that Starbucks' growth is slowing. That's the time for bullish investors to pounce. This last happened not even six months ago, when shares traded for $23-$25 apiece -- the low end of my personal fair value for the shares.
For more caffeine-induced Foolishness:
XM Satellite Radio is a Motley Fool Rule Breakers recommendation.